U.S. inflation slowdown cuts near-term rate hike bets

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U.S. inflation slowdown eases rate hike bets

Highlights

June CPI surprise cut July rate hike odds to 17% from 42% according to CME's FedWatch, boosting equities and lowering Treasury yields.
Market participants warn that oil-price volatility from renewed Iran tensions and Strait of Hormuz risks could reignite inflation and prompt future Fed tightening.
Strategists note the softer inflation data supports U.S. equities and reduces immediate policy risks, but hawkish Fed commentary keeps rate outlook uncertain.

June CPI surprise shifts market expectations

As reported by CNBC, the June inflation reading prompts a broad reassessment of the Federal Reserve's next move, with equities gaining in early trading and Treasury yields moving lower. CME Group's FedWatch tool shows expectations for a July rate hike falling to 17% from 42% on Monday, although traders still see a 63% chance of a higher target rate by the September meeting.

Investors and strategists say the report reduces the case for an immediate tightening move, but does not fully settle the policy outlook. Christopher Rupkey, chief economist at FWDBonds, says current Fed funds settings are now balanced for risks to growth and inflation, while Josh Jamner of ClearBridge Investments says the data should support U.S. equities as rate hike expectations are priced out and yields decline across the curve.

Oil risks keep inflation outlook in focus

Several market participants caution that the softer CPI print may offer only temporary relief because geopolitical tensions are still feeding energy-market uncertainty. Kay Haigh of Goldman Sachs Asset Management says renewed hostilities involving Iran and risks to energy supply through the Strait of Hormuz could worsen the forward-looking inflation picture and eventually force the Federal Open Market Committee to act.

Ryan Weldon of IFM Investors says markets remain focused on sticky core prices and recent hawkish commentary from Fed officials, especially after another rise in oil prices. Skyler Weinand of Regan Capital says the weaker data likely keeps the Fed on hold for now, but adds that recent communication from Chair Warsh has remained hawkish, while Jason Pride of Glenmede says June offers the clearest evidence yet that the earlier energy shock is not broadly spreading through the wider inflation basket.

In our earlier coverage of June U.S. inflation cooling more than expected, we explained that the drop was largely driven by a temporary pullback in gasoline prices. We also noted that renewed tensions around the Strait of Hormuz were already pushing fuel costs higher again, keeping the inflation outlook and the Federal Reserve’s next policy steps uncertain.

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