The latest inflation report is like a shot of adrenaline, boosting the morale of traders betting on an imminent rate cut by the Fed. What is even more noteworthy is that an increasing number of investors are starting to gamble on the possibility of an unexpected rate cut by the Fed.

A generally moderate U.S. inflation report is providing strong support for traders betting on an imminent rate cut by the Fed, and some market participants have even begun to increase their bets on an 'excessive rate cut.'

For weeks now, investors have been pouring into swap contracts, options, and directly going long on U.S. Treasuries, betting that slowing inflation will allow the Fed to lower borrowing costs in the coming months. This view received initial validation on Tuesday: after the July inflation data was released, short-term Treasury yields fell sharply, while swap contract traders raised the probability of a rate cut in September to 90%.

What is more striking is that the market's bets on a Fed rate cut exceeding 25 basis points in September are also heating up. Traders added about $2 million in premiums to positions related to the secured overnight financing rate (SOFR) that would profit from an unexpected rate cut.

Today's (Tuesday) inflation data, though slightly stronger than in previous months, is still well below what Rick Rieder indicated in a research report. 'Therefore, we expect the Fed to initiate a rate cut in September, and there is even a reasonable basis for a 50 basis point cut.'

But Tuesday's report was far from the Fed's 'rate cut gold medal.' While a moderate rise in commodity prices alleviated concerns about tariffs pushing up inflation, the U.S. core inflation rate accelerated to its highest level since the beginning of the year in July.

With more than a month to go before the Fed's meeting on September 16-17, bond bulls still have to endure another important inflation report and key employment data. 'A September rate cut is not set in stone,' said Claudia Sahm, chief economist at New Century Advisors, on Bloomberg TV. 'We have not yet obtained enough data to lock in this decision.'

However, at this moment, bets on the Fed shifting to a dovish stance are becoming the market's focus. Bloomberg's calculations show that if options trading linked to the SOFR September contract (currently with premiums of about $5 million) successfully hits a 50 basis point rate cut, it could yield returns of up to $40 million.

I think the market was quietly anticipating stronger inflation data, but the actual results did not meet expectations. When you consider the other side of the Fed's responsibilities, it suddenly appears that they are further from achieving their employment goals than from achieving their inflation goals,' said Andrew Szczurowski, co-head of the mortgage and securitized investment team at Morgan Stanley Investment Management.

Tiffany Wilding, an economist at PIMCO, stated that she expects core CPI to rise slightly to a peak of 3.4% by the end of the year, as tariff-related costs will be passed on to consumers.

Tom Porcelli, chief U.S. economist at PGIM Fixed Income, stated: 'It will take time for these tariffs to manifest. Anyone expecting these tariffs to suddenly rise sharply in a given month is mistaken. They will gradually become apparent.'

Goldman's trading and research team previously stated that the market has underestimated the likelihood of a 50 basis point rate cut by the Fed in September.

#BinanceAlphaAlert #ETHTreasuryStrategy #ETHOvertakesNetflix