Analysts believe that the CPI data 'could set the tone for the Federal Reserve's policy direction and risk sentiment in the second half of the year.' If inflation data shows increased price pressures, it will further question the likelihood of a rate cut in September and may push yields higher. Conversely, a mild inflation report could reignite bets on monetary easing.
Market confidence in a Federal Reserve rate cut in September is wavering, and the June CPI data released this Tuesday will be a decisive focus.
Strong employment data in early July has led traders to rule out the possibility of a rate cut this month, and the market currently sees the probability of a rate cut in September at about 70%, a significant drop from the firm expectations at the end of June.
The June Consumer Price Index (CPI) data, set to be released on Tuesday, has become the focus. Zachary Griffiths, head of investment-grade and macro strategy at CreditSights, stated that the CPI data 'could set the tone for the Federal Reserve's policy direction and risk sentiment in the second half of the year.'
Economists surveyed by Bloomberg expect the annual core CPI in the U.S. for June to accelerate to 2.9%, the highest level since February. According to Barclays strategists, June has historically been the month with the greatest absolute surprises in recent years.
If inflation data indicates that price pressures have increased since the introduction of Trump's tariff policies, it will further question the likelihood of a rate cut in September and may push yields higher. Conversely, a mild inflation report could reignite bets on monetary easing.
There are significant internal disagreements within the Federal Reserve, and the bond market is in a wait-and-see mode.
Since the interest rate cut in December, the Federal Reserve has maintained borrowing costs. Fed Chair Powell described the current interest rate level as 'moderately restrictive,' and last month's dot plot indicated that officials expect two rate cuts before the end of the year.
However, seven officials believe that rates should not be cut in 2025, while ten officials support two or more cuts. Federal Reserve Governor Christopher Waller and Michelle Bowman have hinted at a desire to resume rate cuts as early as this month.
Powell has made it clear that officials need more time to assess the impact of tariffs on the economy before considering a rate cut, demonstrating the Federal Reserve's cautious attitude in the face of pressure from Trump to cut rates.
Traders lack confidence in the direction of the world's largest bond market, significantly unwinding bullish bets over the past week. The two-year Treasury yield has fluctuated between 3.7% and 4% since early May, and the implied volatility index for U.S. Treasuries has fallen from the tariff-induced peak in April to a three-year low.
However, last week's auctions for 10-year and 30-year Treasuries showed solid demand, which could limit selling during poor inflation data. Bloomberg strategist Alyce Andres pointed out that U.S. Treasury yields are currently at the midpoint of the 2025 range, 'Expectations for these data may keep bond rates fluctuating within a familiar range.'
Before the September decision, the Federal Reserve will receive two pieces of CPI data. Tracy Chen, a portfolio manager at Global Investment Management, believes that 'we should see the impact of the tariff war in the upcoming inflation report. I do not believe the Fed will cut rates in September. The resilience of the labor market and the risk of a bubble in the asset market do not provide reasons for a rate cut.'
She expects the yield curve may steepen, with long-term bonds facing pressures from rising inflation, government spending prospects, and changes in foreign demand.
John Lloyd, the global multi-asset credit head, stated that even if the next interest rate cut is delayed until after September, it may not disrupt the easing path. 'The market is pricing in two interest rate cuts before December. Will one be pushed back? Possibly, but it might just be delayed until the first quarter of next year.'