Macro● Neutral
Bond market still expects Fed rate hikes despite softer CPI
June CPI came in cool, easing July hike odds, but Fed officials signaled more tightening ahead. The bond market still prices in one more rate increase this year.
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June consumer prices rose less than forecast, cooling bets on a July rate increase, traders said. The core CPI, which strips out food and energy, came in at 0.2% month over month, below the 0.3% consensus. Fed funds futures shifted to price in about a 30% chance of a quarter-point hike at the July 26 meeting, down from nearly 70% a week earlier.
Fed officials, however, pushed back against the dovish read. Minutes from the June meeting showed several participants saw a need for further tightening to bring inflation back to 2%. Chair Jerome Powell, in a speech Thursday, called the disinflation process “a long way to go” and stressed that the labor market remains tight. The bond market now prices in at least one more increase by year-end, with the terminal rate around 5.6%, based on OIS forwards.