Wall Street on Alert for Tonight's CPI "False Cool Down," Bond Market Already Betting on July Rate Hike

BlockBeats News, July 14th. The U.S. will release the June CPI data at 8:30 p.m. Beijing time tonight. The market generally expects that due to the decline in gasoline prices, the overall CPI in June may decrease by 0.1% to 0.2% on a month-over-month basis, and the year-over-year growth rate is expected to drop from May's 4.2% to 3.8%; the core CPI is expected to rise by about 0.2% on a monthly basis, with the year-on-year rate falling to around 2.8%.

However, several Wall Street institutions believe that this cooling of inflation is more due to the fall in energy prices and does not mean that inflationary pressures in the U.S. have dissipated. The pass-through of housing, car insurance, travel services, and tariffs to commodity prices may still keep core inflation sticky.

At the same time, the bond market is further betting on a Fed rate hike. Interest rate options show that the implied probability of a 25 basis point rate hike by the Fed in July has risen from less than 10% to about 50%, with the 2-year U.S. Treasury yield remaining above 4.25%. Previously, Fed Governor Waller stated that if core inflation were to rise again, a short-term rate hike should be considered.

Institutions generally believe that even though the overall CPI may fall due to the drag from energy prices, the performance of core CPI and its subcomponent structure will still be key to determining whether U.S. inflation has truly peaked and to the subsequent policy path of the Fed.