The sky changes overnight! U.S. inflation cools more than expected, probability of Fed raising interest rates this month plummets to 15%
【The sky changes overnight! U.S. inflation cooled more than expected, and the probability of the Federal Reserve raising interest rates this month plummeted to 15%] On Tuesday, U.S. inflation data unexpectedly slowed sharply, triggering a joint rebound in the U.S. stock and bond markets, and traders also withdrew their bets that the Federal Reserve might raise interest rates as early as this month. The move marks another rapid reversal on Wall Street - market expectations that the Fed may raise interest rates at its July interest rate meeting have continued to rise due to hawkish comments from Fed officials and a renewed rise in oil prices due to the renewed conflict between the United States and Iran.
An unexpectedly sharp slowdown in U.S. inflation data on Tuesday triggered a rally in U.S. stock and bond markets, with traders withdrawing bets that the Federal Reserve could raise interest rates as early as this month. The move marks another rapid reversal on Wall Street - market expectations that the Fed may raise interest rates at its July interest rate meeting have continued to rise due to hawkish comments from Fed officials and a renewed rise in oil prices due to the renewed conflict between the United States and Iran. However, the latest inflation report released by the U.S. Department of Labor on Tuesday showed that the CPI fell sharply by 0.4% month-on-month in June, which was far lower than market expectations. It also saw the first month-on-month negative growth since the COVID-19 epidemic in 2020. This is considered to almost certainly buy some time for the Federal Reserve to keep interest rates unchanged. Interest rate futures traders also postponed the possible window for the Federal Reserve to raise interest rates overnight to September or October. CME Group's FedWatch tool shows that traders' latest probability estimates for a July interest rate hike have plummeted to 15%, which was close to 50% the day before. In the stock, bond and foreign exchange market, the three major U.S. stock indexes all rose on Tuesday. The two-year Treasury bond yield, which is closely related to changes in monetary policy, plummeted 14 basis points to 4.14% during the session, the largest intraday drop since August. The dollar was also lower against all other major currencies. "Today's data basically rules out a rate hike in July," said Zach Griffiths, head of investment grade and macro strategy at CreditSights. "While inflation remains high and tensions in the Middle East are deteriorating, today's data should provide the Fed with enough reason to remain on the sidelines." However, the rally in U.S. Treasuries faded in late New York trading after Federal Reserve Chairman Kevin Warsh still made relatively hawkish remarks while testifying on Capitol Hill. Warsh, who succeeded Powell as Fed chairman in May, said policymakers are committed to containing inflation that has been above the Fed's 2% inflation target since the outbreak. Warsh also downplayed the significance of June's data, saying they did not mean "everything is fine." Finally, U.S. Treasury yields of all maturities narrowed their losses for the day in late trading. The 2-year U.S. Treasury yield finally fell 7.76 basis points throughout the day to 4.193%, the 5-year U.S. Treasury yield fell 5.15 basis points to 4.319%, the 10-year U.S. Treasury yield fell 2.61 basis points to 4.591%, and the 30-year U.S. Treasury yield fell 0.11 basis points to 5.104%. Still, traders now believe the easing in price pressures is enough for the Fed to hold off this month, at least temporarily extending the central bank's pause on rate hikes since late last year. "This will relieve some of the pressure on the Fed to raise interest rates this year," said Tracy Chen, portfolio manager at Brandywine Global Investment Management. “But given the new normal in terms of fighting in Iran, we may not be completely out of the woods yet.” Many other investment bankers generally expressed similar views. Kay Haigh of Goldman Sachs Asset Management pointed out that CPI may reduce pressure on the Federal Reserve to raise interest rates in the near future, but the hostilities between the United States and Iran mean that the possibility of raising interest rates is far from eliminated. He said that while the possibility of interest rates remaining unchanged this year remained, the renewed escalation of the conflict narrowed that possibility. In late February, as Trump launched a war against Iran and the oil shock rippled through the global economy, long-term market interest rates soared, and the market generally expected that the Federal Reserve and other central banks would need to tighten monetary policy to prevent a price spiral. Speculation that the Fed could begin tightening policy as early as this month has surfaced since Warsh held his first post-meeting press conference last month, when he reiterated the Fed's commitment to bringing inflation back to target. After the release of the CPI report on Tuesday, the market trend has changed. However, repeated changes in the economic situation over the past few years have still kept many traders wary. With renewed fighting in the Strait of Hormuz leading to another rise in Brent crude oil prices, the easing in inflation is likely to be temporary. On Tuesday, oil prices hovered around $85, up nearly 20% from their lows earlier this month.
Bret Kenwell, eToro strategist, said: "Today's report provides a breather, but it is not a complete warning. Although inflation has cooled down, it has not completely disappeared." (
Bret Kenwell, eToro strategist, said: "Today's report provides a breather, but it is not a complete warning. Although inflation has cooled down, it has not completely disappeared." (