CPI Miss Reshapes Fed Path, Hits Dollar and Yields

The June CPI print landed well below consensus. Headline inflation fell 0.4% month-on-month against expectations for a 0.1% decline. Core inflation came in flat, missing the 0.2% consensus estimate. Shelter costs, the stickiest component through the past year, rose just 0.1% month-on-month, the smallest gain since January 2021.

Headline inflation dropped to 3.5% year-on-year from 4.2% in May. The data leaves Fed Chair Warsh room to hold rates steady at the July meeting, traders said. The CME FedWatch tool showed a 78% probability of no change, up from 62% before the release.

The dollar sold off across the board. The DXY fell 0.7% to 104.20, its lowest since mid-May. The euro rose to $1.0920, and the yen strengthened past 155 per dollar for the first time in three weeks.

Treasury yields plunged. The 10-year note dropped 12 basis points to 4.18%. The 2-year yield fell 14 basis points to 4.52%, the steepest single-day decline since March. The yield curve steepened slightly, with the 2s10s spread narrowing to -34 basis points from -36.

Equity markets rallied on the softer inflation data. The S&P 500 gained 1.8%, led by rate-sensitive sectors. Real estate and utilities each rose more than 2.5%. The Nasdaq Composite added 2.1%, with megacap tech stocks posting broad gains. The SPY stock page showed an Alpha Score of 38/100, labeled Mixed, reflecting the crosscurrents between lower rates and still-elevated valuations.

Gold jumped 1.5% to $2,385 an ounce, its highest since April. Crude oil edged up 0.3% to $82.10 a barrel, supported by a weaker dollar but capped by demand concerns. Bitcoin rose 3.2% to $68,500, tracking the risk-on move in equities.

The next policy signal comes Thursday, when Fed Governor Lisa Cook speaks at a monetary policy forum in New York.