Inflation Pulls a 0.4% Plot Twist, Fed Rate Hike Bets Hit the Brakes 🛑

U.S. Consumer Price Index data for June delivered a far larger-than-expected decline of 0.4%, easing market expectations that the Federal Reserve would raise interest rates at its late-July meeting. Economists had forecast a 0.1% drop, while May's CPI rose 0.5%. On a year-over-year basis, CPI climbed 3.5%, below forecasts for 3.8% and May's 4.2%.

Core CPI, which excludes food and energy, was flat in June against expectations for a 0.2% increase and following May's 0.2% gain. Year-over-year core CPI rose 2.6%, compared with forecasts of 2.8% and May's 2.9%. The softer print followed remarks from Fed Governor Chris Waller on July 13 that he would favor an immediate rate hike if core CPI did not decline in the report. CME FedWatch data showed July rate-hike probabilities had risen to as high as 42% from 8% one month earlier.

Bitcoin added to earlier gains after the release, trading at $63,400, up roughly 2% over 24 hours. U.S. stock index futures also advanced, with Nasdaq 100 futures up 1.25%. Bond yields fell sharply, with the U.S. 2-year Treasury yield down seven basis points to 4.19% and the 10-year yield down five basis points to 4.56%.

Fed Chairman Kevin Warsh is scheduled to deliver congressional testimony on the state of the economy beginning roughly 90 minutes after the report's release. Markets will parse his remarks for indications on the path of monetary policy following the cooler-than-expected inflation data.