DBS Group Research economist Samuel Tse and Senior Rates Strategist Eugene Leow analyse USD rates after softer June CPI data. They note the US Treasuries curve bull steepened as headline and core CPI surprised to the downside, with energy and some core services prices falling. Despite this, they argue resilient US economic activity, strong equities and higher Oil mean inflation concerns and Fed tightening expectations are only temporarily eased.

Treasuries bull steepen on soft CPI

"The US Treasuries curve bull steepened amidst cool June CPI figures. Headline and core CPI came in at -0.4% MoM sa and 0.0% MoM sa respectively, both meaningfully below consensus estimates (-0.1% MoM sa and 0.2% MoM sa respectively). Nominal frontend yields were lofty (with 2Y yields pushing 4.3%) heading into the data release, and the market was caught wrong-footed at the benign prints."

"Unsurprisingly, the biggest drag on prices came from the 5.7% MoM decline in energy prices. We also note that prices for core services less shelter also dropped by 0.4% MoM, suggesting that price pressures are not widespread just yet. The biggest source of inflation was from the computer software and accessories component amidst the AI boom."

"We don’t think this CPI print changes the narrative for USD rates. Against a backdrop of resilient US economic activity, buoyant stock market and a resurgence in oil prices, we doubt inflation worries (and Fed tightening bets) would fade that quickly. Instead, we see think market participants would likely still be in pay-on-dip mode."

"That said, July is no longer live. Between a more subdued NFP print and cold CPI figures, bets on Fed tightening have been pushed towards the end of the year."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)