On July 15th, data released by the US Department of Labor revealed a significant cooldown in inflation for the month of June. The Consumer Price Index (CPI) fell by 0.4% month-over-month, marking the largest single-month decline since April 2020. This figure was notably lower than the market forecast of a 0.1% decrease and represented the first negative month-over-month reading in six years. The year-over-year increase dropped sharply to 3.5% from May's 4.2%, also coming in below the anticipated 3.8%. The core CPI, which excludes volatile food and energy prices, was flat month-over-month and rose 2.6% year-over-year, both measures falling short of market expectations. A substantial drop in energy prices was the primary driver behind the easing inflation.

Following the data release, expectations in the interest rate futures market shifted dramatically. According to the CME Group's FedWatch tool, market-implied probability of a Federal Reserve interest rate hike in July plummeted to 15.5% from nearly 50% the previous day. Conversely, the probability of the Fed holding rates steady in July surged to 84.5%. The window for a potential rate hike was pushed back to September or October, with combined probabilities for a September hike totaling approximately 57.8%. The yield on the two-year US Treasury note tumbled as much as 14 basis points to 4.14% during the session, while the US Dollar Index came under pressure and declined.

However, Federal Reserve Chair Jerome Powell maintained a relatively hawkish stance during his Congressional testimony, explicitly stating that the June data does not signify that "all is well." He remarked, "Some may say the job is done. I don't see it that way." Powell emphasized a "zero tolerance" approach towards persistent high inflation and cautioned against interpreting a single month's data as a signal of an imminent policy shift.

Analysis from CITIC Securities points out that US inflation lacks strong persistence, with the overall year-over-year CPI having definitively passed its peak for the current cycle. The firm continues to anticipate that the Federal Reserve will hold rates steady for the remainder of the year, suggesting there is further room for downward revision in the rate hike expectations priced into derivative markets.