Unexpected cooling of U.S. inflation triggers rebound in U.S. bonds, market withdraws bets on Fed rate hike in July
U.S. inflation data unexpectedly cooled significantly in June, prompting the market to quickly adjust expectations for the Federal Reserve's monetary policy. U.S. Treasuries rose sharply on Tuesday as traders withdrew their bets on the Federal Reserve raising interest rates as soon as July and pushed back expectations for a rate hike to September or October. Data released by the U.S. Department of Labor that day showed that the U.S. Consumer Price Index (CPI) fell by 0.4% month-on-month in June, marking the first monthly decline since 2020. The decline was also significantly better than market expectations. After the release of this data, the market generally believed that the Federal Reserve would get more time to observe inflation trends without taking action to raise interest rates this month. Affected by this, U.S. Treasury bond prices rose across the board. Among them, the 2-year U.S. Treasury yield, which is most sensitive to monetary policy, once fell 14 basis points to 4.14%, the largest one-day drop since August last year. It later narrowed some of the decline and was still down about 10 basis points in late trading. At the same time, the three major U.S. stock indexes generally rose, and the U.S. dollar weakened across the board against major currencies. Zach Griffiths, head of investment grade bonds and macro strategy at CreditSights, said: "The inflation data released today basically rule out the possibility of the Federal Reserve raising interest rates in July. Although inflation is still above the target and the situation in the Middle East continues to deteriorate, this data is enough for the Federal Reserve to continue to wait and see." However, later in the day, Federal Reserve Chairman Kevin Warsh continued to send hawkish signals at a congressional hearing, causing the bond market's gains to narrow. Warsh said the Fed remains firmly committed to its goal of lowering inflation to 2% and stressed that the problem cannot be considered solved just because inflation data improved in a single month. Despite this, the market still generally expects that the Federal Reserve will maintain the federal funds rate target range at 3.50% to 3.75% at its interest rate meeting on July 29. Data showed that the core CPI, excluding food and energy prices, was unexpectedly flat month-on-month in June, further alleviating market concerns about rising inflation. Tracy Chen, portfolio manager at Brandywine Global Investment Management, said the latest inflation data will reduce pressure on the Federal Reserve to raise interest rates this year, but as tensions with Iran continue, the market is still not completely free of risks. In fact, the recent conflicts in the Middle East have significantly boosted market expectations for interest rate hikes. Since the escalation of the conflict between the United States and Iran at the end of February this year, international oil prices have continued to rise, and investors are worried that rising energy prices will push up inflation again and force the Federal Reserve to further tighten monetary policy. Especially after Federal Reserve Chairman Warsh hosted his first interest rate meeting last month, many officials successively issued hawkish speeches. The market once expected that the Federal Reserve might resume raising interest rates as soon as July. On Monday, Federal Reserve Governor Christopher Waller said that if inflation data becomes "hot" again, a rate hike should be considered "in the near future." Affected by this, the interest rate futures market once reflected that the probability of a 25 basis point interest rate hike in July was close to 50%. However, with the release of the latest CPI data, the market quickly adjusted its expectations. Currently, traders generally expect the Fed to be more likely to raise interest rates next in September or October. It is worth noting that although the inflation data this time was better than expected, the market believes that there are still recurring risks of future inflation. Affected by renewed tensions in the Strait of Hormuz, Brent crude oil prices have rebounded to around US$85 per barrel, up nearly 20% from the lows at the beginning of this month. A renewed rise in energy prices may once again push up inflationary pressures. Pacific Investment Management Company economist Tiffany Wilding said that the latest inflation data undoubtedly relieved many Federal Reserve officials. Although it will not completely close the door to future interest rate increases, it at least provides more space for the Federal Reserve to continue to wait and see. Open a futures account on Sina's cooperative platform, safe, fast and guaranteed