On Thursday, treasuries saw a significant upward move as traders responded to a highly anticipated report on consumer price inflation. The session started with bond prices surging and maintaining a strong positive trend throughout the day. Consequently, the yield on the benchmark ten-year note, which inversely correlates with its price, dropped by 8.7 basis points to 4.193 percent.
The catalyst for this rally was a Labor Department report indicating an unexpected slight decrease in U.S. consumer prices for June. According to the report, the consumer price index (CPI) fell by 0.1 percent in June, following an unchanged reading in May. Economists had predicted a 0.1 percent increase in consumer prices.
The unexpected decline in consumer prices was attributed to a considerable fall in gasoline prices, which outweighed an ongoing rise in shelter costs. When excluding food and energy, core consumer prices increased by 0.1 percent in June, slightly less than the 0.2 percent rise in May. The core prices were anticipated to grow by another 0.2 percent.
Additionally, the report revealed that the annual rate of consumer price growth decreased to 3.0 percent in June from May’s 3.3 percent. Economists had forecasted a deceleration to 3.1 percent. The annual rate of core consumer price growth also slowed to 3.3 percent in June from 3.4 percent in May, against expectations of maintaining the same pace.
These slowdowns in annual price growth have fueled optimism that the Federal Reserve might lower interest rates as early as their September meeting. Bill Adams, Chief Economist at Comerica Bank, remarked, "This is the kind of CPI report the Fed wants to see to feel more confident that inflation is headed back toward their target. The Fed targets 2% inflation by the personal consumption expenditures price index, which usually runs a little cooler than the CPI."
He also noted, "The CPI report won't be enough to convince the Fed to cut interest rates at their decision this month, but a rate cut at the following decision in September is quite likely."
Attention is now turning to a report on producer price inflation and a consumer sentiment report, which includes readings on inflation expectations, both of which are scheduled for release on Thursday.
