After the release of the high-profile US CPI data in July, investors in the US bond market strengthened their bets on the US Federal Reserve officials to cut interest rates by 25 basis points in September, while the expectation of a straight cut of 50 basis points cooled.
The pricing of the interest rate swap market shows that traders' latest overnight pricing for the Fed's September meeting rate cut is 32 basis points (more inclined towards 25 basis points). The Chicago Mercantile Exchange's Federal Reserve observation tool also showed that the probability of the Fed cutting interest rates by 25 basis points at the meeting increased to 64%, while the probability of cutting interest rates by 50 basis points was only 36%.
Earlier this week, the probability of a 25 basis point and 50 basis point rate cut in September was almost 50-50.
Looking back at the performance of the overnight US Treasury market, the market situation was quite volatile after the release of CPI data. The yield of 2-year US Treasury bonds experienced an "elevator" trend with fluctuations of more than ten basis points in a short period of time, but ultimately failed to break through the 4% mark.
As of the end of the New York trading session, the final rise and fall of US bond yields varied among different maturities. Among them, the yield of 2-year US Treasury bonds rose 2.8 basis points to 3.97%, the yield of 5-year US Treasury bonds rose 0.6 basis points to 3.684%, the yield of 10-year US Treasury bonds fell 0.9 basis points to 3.84%, and the yield of 30-year US Treasury bonds fell 3.4 basis points to 4.129%.
David Kelly, Chief Global Strategist at JPMorgan Asset Management, stated in an interview that the CPI data confirms that inflation is subsiding, as the data is close to expectations. Therefore, investors began to sell based on the selling sentiment after the news was released, which is the current situation in the bond market.
In Wednesday's trading, the option flow data linked to the guaranteed overnight financing rate (closely tracking the central bank's policy path) reflected many traders closing their bets on a 50 basis point interest rate cut. Due to the pricing tendency of the swap market towards a 25 basis point rate cut rather than a direct 50 basis point drop, other related traders seem to have adjusted their dovish bets as well.
The data released by the US Bureau of Labor Statistics on Wednesday showed that the US CPI in July fell below 3% year-on-year for the first time since 2021, at 2.9%. The core CPI excluding volatile food and energy prices for the month increased by 3.2% year-on-year and 0.2% month on month.
This report may give the Federal Reserve sufficient reason to start cutting interest rates at its next meeting on September 17-18. The PCE Price Index, the preferred inflation indicator of the Federal Reserve released later each month, is approaching the Fed's 2% target, and Fed Chairman Powell has hinted that the Fed is likely to cut interest rates in September.
Of course, in the latest CPI report, inflation in certain core service categories, including housing rent and car insurance, remains high. This is also why many industry insiders are more inclined to support a 25 basis point interest rate cut overnight. However, it can be foreseen that although people's expectations for a 25 basis point interest rate cut are currently higher, the CPI data itself may not be enough to draw a definitive conclusion. The current performance of the job market data may have more indicative significance for how much interest rate cuts should be made.
Lindsay Rosner, Head of Fixed Income at Goldman Sachs Asset Management, stated that inflation data "cleared the way for a 25 basis point rate cut in September, but at the same time did not completely close the possibility of a 50 basis point rate cut.
Neil Sutherland, portfolio manager at Schroder Investment Management, pointed out that "we are indeed seeing a weaker labor market. As the market debates the size of the Fed's possible interest rate cut in September, labor market data may give us a clearer understanding.
Renowned journalist Nick Timiraos, known as the "New Federal Reserve News Agency," stated on Wednesday after the release of inflation data that the July CPI data has paved the way for the Federal Reserve to begin cutting interest rates at its September meeting. He expects that the focus of discussion at the Federal Reserve's September meeting will be on the scale of interest rate cuts, whether to follow the traditional 25 basis point cut or a larger 50 basis point cut. The reason why the scale of interest rate cuts may become a focus of discussion is that the US labor market has recently shown potential signs of weakness, but the inflation data released on Wednesday has not resolved this debate.
Timiraos also believes that this debate may ultimately be determined by labor market reports, including weekly initial jobless claims and the August non farm payroll report to be released on September 6th. If we want to cut interest rates by 50 basis points, it depends on whether there is a bad situation in the labor market.
Chicago Fed President Austan Goolsbee pointed out on Wednesday that he is increasingly concerned about the labor market rather than inflation, given recent progress in price pressures and disappointing employment data. He declined to comment on the possibility and magnitude of the Federal Reserve's interest rate cut at the September meeting.