Markets now price just 2bps of Fed tightening for July after softer US inflation data, down from 11bps earlier this week.
Softer US inflation data has reduced expectations for near-term Federal Reserve tightening, pushing front-end Treasury yields lower and weighing on the US Dollar. The shift follows a second consecutive downside inflation surprise, with markets now pricing only 2bps of Fed hikes for July, down from 11bps on Monday.
US Producer Price Index data, both headline and core, came in weaker than expected, reinforcing the disinflation narrative. The report also indicated stabilization in prices of certain electronic components, easing concerns about broader inflation pressures from AI-related investments.
Despite the weaker USD and lower yields, gains in risk-sensitive assets remain limited due to higher oil prices and geopolitical risks in the Middle East. Analysts still expect modest USD appreciation by year-end, favoring carry trades in the current environment.