Summary

US Treasury yields fell as June CPI (-0.4% MoM, 3.5% YoY) and PPI data came in weaker than expected, causing the probability of a July rate hike to plummet from near 50% to approximately 15% QQ News+ 2. While oil price volatility and hawkish comments from Fed officials like Warsh and Waller keep some pressure on the long end, the market is increasingly betting on a policy pause until at least September Zhitong+ 3.

Impact Analysis

So the market is finally calling the Fed’s bluff. That -0.4% MoM print is a massive psychological pivot; it’s the first negative reading since the pandemic, and it basically kills the July hike narrative despite the hawkish noise we’re still hearing from Warsh and Waller [QQ News][]. We’re seeing a classic rally in Treasuries, with the 2-year yield taking a real haircut as traders aggressively unwind their hike hedges [Zhitong][].

However, don’t get too comfortable in a straight duration play just yet. The oil rebound linked to Middle East tensions is the elephant in the room that could easily re-ignite ‘sticky inflation’ fears by next month [Sina Finance][Wallstreetcn]. The Fed is clearly looking for any excuse to stay restrictive, and they’ll use energy prices to justify it if the next data point turns. Bottom line: the path of least resistance for yields is lower for now, but the volatility isn’t over. I’d favor a bull steepener here—the front end has more room to drop if the Fed actually skips July [Sina Finance][].