Since the beginning of this month, a rather rare phenomenon has been emerging in the US interest rate market, where almost every 'big day' for economic data releases (including Fed decision days) has dampened expectations for Fed rate cuts...

Bianco Research strategist Jim Bianco stated on social media on Tuesday that the next FOMC meeting with a probability of rate cuts exceeding 50% is not until the September meeting — the latest probability for a cut at the September meeting exceeds 60%.

However, less than two weeks ago, this probability actually exceeded 100%, indicating that everyone was betting that rate cuts would be initiated much earlier.

Bianco lamented that if this trend continues, the next window for a rate cut could soon be pushed back to December.

It is worth mentioning that a chart attached by Bianco in his post indeed shows that since the beginning of this month, from the ISM manufacturing PMI, non-farm payrolls, ISM services PMI, Fed's decision release, to the latest US April CPI data last night, the expectations for Fed rate cuts have almost been weakened on every 'big day'...

This does not mean that all data is unfavorable for the prospect of rate cuts. For example, the lower-than-expected US April CPI data released yesterday should have been favorable for the Fed to cut rates early, but oddly, even with Trump using the data to pressure Fed Chairman Powell, the expectations for rate cuts are still weakening: The US Bureau of Labor Statistics reported Tuesday that the CPI rose 0.2% month-on-month in April and 2.3% year-on-year, both below market expectations of 0.3% and 2.4%. The core CPI, excluding volatile food and energy prices, rose 0.2% month-on-month and 2.8% year-on-year, consistent with expectations. The CPI of 2.3% and the core CPI increase of 2.8% year-on-year are both the lowest since early 2021.

After the CPI data was released, Trump once again pressured Fed Chairman Powell to take action on rate cuts.

Trump wrote on the social platform Truth Social, ‘There is no inflation anymore! The prices of gasoline, energy, groceries, and almost all other goods are falling!!!’ The Fed must lower interest rates, just like Europe and China have already done. What's going on with 'Mr. Delay' Powell? Isn't this a bit unfair to the soon-to-soar America? Let the rate cuts happen; it will be a wonderful thing!’

However, data from the rate futures market on Tuesday still showed that expectations for Fed rate cuts are weakening — further moving towards only two cuts for the year.

Is the decline in CPI still unable to guarantee a rate cut?

So, if earlier this month, several hot US data sets did not support a Fed rate cut, it is understandable; why then did yesterday's CPI data still fail to ignite market expectations for rate cuts?

In response, a data commentary from Nick Timiraos of the 'New Fed Communications' may reflect the current market sentiment: that from the future trend of CPI evolution, the Fed still has almost no reason to change its wait-and-see stance.

Timiraos believes that this data basically aligns with the expectations of closely tracking how the Labor Department measures inflation. If there is any good news, it is that the CPI data is not at the expected upper limit — or worse.

But even so, for the Federal Reserve, the inflation data for April is like a piece of good weather news just before a highly anticipated storm (the last one) arrives — and the intensity of this storm remains uncertain. This CPI report may only make officials feel more at ease about last year's decision to cut interest rates by 100 basis points.

He believes that if it weren't for the broad increase in tariffs in April, this inflation data might have allowed the Federal Reserve to consider cutting rates again soon. However, potential cost increases in the coming months are likely to keep the Fed on hold until it can better assess whether the price increases are just a one-time phenomenon.

Interest rate expectations are 'changing every day'

Currently, an increasing number of market traders are abandoning their bets on Fed rate cuts.

Data from the Chicago Mercantile Exchange (CME) on Tuesday confirmed that several large bets on interest rate cuts have been closed — one position aimed for as many as four 25 basis point cuts this year, and this closing could lead to losses of up to $10 million. Swaps linked to the Federal Reserve's policy meetings currently reflect a cut of just over 50 basis points this year, while last month's expectations for cuts exceeded 100 basis points.

‘The rapid changes in news related to tariffs, trade agreements, geopolitical tensions, and domestic fiscal policy are enough to make one adjust expectations for the Fed's rate cut (or hike) target meeting point every day,’ wrote Jefferies strategist Thomas Simons in a research report.

As traders exit their bets on a dovish stance from the Fed, major Wall Street banks are also rapidly reshaping their expectations for Fed policy.

Goldman Sachs and Barclays now both expect the first rate cut to occur in December rather than the originally anticipated July, Citigroup has adjusted the timing of the cut from June to July, and JPMorgan has pushed its rate cut expectation from September to December.

Simons stated: ‘The potential impact of tariffs, along with persistent inflationary pressures in interest-sensitive sectors like housing and automotive, suggests limited room for rate cuts. Therefore, the Fed maintaining patience remains its best course forward.’

From the option activity at the long end of the treasury curve, the demand for protection against rising yields has been increasing. In Tuesday's trading, multiple bets targeted a rise in the 10-year yield to nearly 5% in the coming weeks, about 50 basis points higher than the current level.

In the spot market, bearish sentiment towards bonds is also heating up. A US Treasury client survey released by JPMorgan on Tuesday showed that pure short positions have risen to the highest level in seven weeks, while net long positions have shrunk to the lowest level since February 10.