July inflation data came in below expectations, raising the likelihood of interest rate cuts to 93%
On the 12th, the U.S. Bureau of Labor Statistics released July’s Consumer Price Index (CPI) data showing a year-on-year increase of 2.7%, below the market expectation of 2.8%, and unchanged from June. The month-on-month increase was 0.2%, in line with expectations and lower than June's 0.3%. Although the core CPI year-on-year growth rate rose to 3.1%, higher than the expected 3.0% and June's 2.9%, the moderate performance of overall inflation data still brought optimism to the market.
Source: Investing July Consumer Price Index (CPI) year-on-year increase of 2.7%, below market expectation of 2.8%
After the data release, the federal funds futures market saw a significant rise in expectations for a rate cut by the Fed in September. According to the CME FedWatch Tool, the probability of a 25 basis point cut in September surged from about 84% before the data release to over 94.2%, reflecting strong market expectations for monetary policy easing.
Federal Reserve officials have recently signaled rate cuts. Governor Michelle Bowman stated that she voted in favor of rate cuts at a recent policy meeting, citing 'signs of weakness' in the labor market, slowing economic growth, and diminishing labor market vitality. She believes that the impact of tariffs on consumer prices will be temporary, and the central bank should focus on bringing inflation back to the 2% target.
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Cryptocurrency market strongly rebounds, will Ethereum return to glory?
After the CPI data was released, the cryptocurrency market immediately saw a strong rebound. The price of Bitcoin ($BTC) rose from approximately $119,082 to $120,168, showing a moderate but steady upward trend. Ethereum ($ETH) performed even better, rising over 7.8% within 24 hours, breaking through the $4,600 barrier, and peaking at $4,644.52.
Source: TradingView Bitcoin and Ethereum perform brilliantly
According to TradingView data, the total cryptocurrency market cap skyrocketed from $3.9 trillion to $3.99 trillion. In addition to Bitcoin and Ethereum, major cryptocurrencies such as Ripple ($XRP) and Solana ($SOL) also saw significant gains.
Source: TradingView Total cryptocurrency market cap reaches $3.99 trillion
CoinGlass data shows that within 60 minutes after the data release, $40 million worth of Ethereum short positions were liquidated.
Analysts point out that the strong reaction in the cryptocurrency market mainly stems from the warming of interest rate cut expectations. A lower interest rate environment typically favors risk assets, including stocks and cryptocurrencies, as investors seek higher-yielding investment targets. Analyst Kyle Chasse commented: 'The market is no longer guessing, but pricing in these expectations.'
Tariff effects gradually emerge, core inflation still poses concerns
Despite the overall CPI data showing moderate performance, the rise in core inflation still raises concerns. Core CPI rose 0.3% month-on-month, the largest increase since January this year, and the year-on-year growth rate of 3.1% also hit a five-month high. The acceleration in service prices was a major driving factor, with airfare prices seeing the largest increase in three years, and prices for healthcare and entertainment also rising.
Economists pointed out that the expansion of core CPI and service inflation indicates that the effects of the Trump administration's tariff policies are gradually emerging. American companies stockpiled goods in large quantities in previous months to cope with tariff increases, but as inventory gradually depletes, tariff costs may start to be passed on to consumers. Scott Lincicome, vice president of the Cato Institute, warned: 'Not only are effective tariff rates rising, but inventories are also decreasing, and many American companies have announced price increases, with more increases on the way.'
Federal Reserve Chair Jerome Powell has consistently emphasized the central bank's focus on 12-month inflation data, making the rise in core inflation a potential concern. Nevertheless, signs of weakness in the labor market provide additional justification for rate cuts. Earlier employment data showed downward revisions of 258,000 jobs for May and June, highlighting the fragility of the labor market.
Market focuses on Fed policy direction, DeFi ecosystem benefits
According to reports from Bloomberg, Treasury Secretary Scott Bessent stated after the data release that the central bank should consider a more significant rate cut at the September meeting, suggesting a 50 basis point cut instead of the market's expected 25 basis points. He praised the inflation data as 'incredible' and believed the Fed has room to take more decisive monetary policy action.
Traditional financial markets also reacted positively to the data. The dollar weakened, and the yield on 10-year U.S. Treasuries fell by 3 basis points to 4.26%. U.S. stock futures rose, here are the gains and losses when U.S. markets closed:
Dow Jones Index: Up 483.52 points, a 1.1% increase, closing at 44,458.61 points;
Nasdaq Index: Up 296.5 points, a 1.39% increase, closing at 21,681.9 points;
S&P 500 Index: Up 16.53 points, a 0.27% increase, closing at 6,445.76 points.
Philadelphia Semiconductor Index: Up 169.71 points, a 2.99% increase, closing at 5,840.09 points.
NYSE FANG+ Index: Up 202.44 points, a 1.33% increase, closing at 15,464.78 points.
For the cryptocurrency market, the warming of interest rate cut expectations not only drives prices up but also brings positives for the decentralized finance (DeFi) ecosystem. A lower interest rate environment makes the yields offered by DeFi protocols more attractive, potentially attracting more funds. Analysts expect that if the Federal Reserve cuts rates as scheduled in September, the cryptocurrency market may welcome a new round of bullish trends.
'CPI lower than expected! 94% chance of rate cuts in September, will Ethereum soar past 4600 to return to glory?' This article was first published on 'Crypto City'
