US yields fell sharply on Wednesday after data showed that inflation slowed more than expected in June. The headline Consumer Price Index (CPI) fell to 3.0% year-over-year, while the core CPI, which excludes food and energy, fell to 4.8%. This was the first time since April 2022 that the headline CPI had fallen below 3.0%.

The sharp decline in inflation expectations led to a sell-off in US Treasuries. The yield on the 10-year Treasury note fell 29 basis points to 2.92%, its lowest level since April. The dollar also weakened, falling to its lowest level against the euro since April.

The decline in yields and the dollar benefited equities, which rose across the board. The S&P 500 index closed up 1.2%, while the Nasdaq Composite index closed up 1.7%.

The market’s focus now turns to Thursday’s release of US jobless claims and producer price index (PPI) data. Jobless claims are expected to rise slightly, while PPI is expected to rise at a slower pace than in May.

If the data comes in as expected, it will likely solidify the view that the Federal Reserve will pause its interest rate hiking cycle in September. However, if the data is stronger than expected, it could lead to renewed concerns about inflation and could prompt the Fed to raise rates more aggressively.

Bottom Line

The decline in inflation expectations has led to a sell-off in US Treasuries and a weakening of the dollar. This has benefited equities, which have risen across the board.

The market’s focus now turns to Thursday’s release of jobless claims and PPI data. If the data comes in as expected, it will likely solidify the view that the Fed will pause its interest rate hiking cycle in September.

However, if the data is stronger than expected, it could lead to renewed concerns about inflation and could prompt the Fed to raise rates more aggressively.

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