If this week's CPI is "not ideal," it will also be difficult for the Federal Reserve to cut interest rates in September?

Market confidence in the Federal Reserve's interest rate cut in September is wavering, with the June CPI data to be released this Tuesday becoming a decisive focus.

Strong employment data in early July has led traders to rule out the possibility of a rate cut this month, and the market currently estimates the probability of a rate cut in September at about 70%, a significant drop from the certainty seen at the end of June.

The June Consumer Price Index (CPI) data to be released on Tuesday is in the spotlight. Zachary Griffiths, head of investment-grade and macro strategy at CreditSights, stated that the CPI data "could set the tone for the Federal Reserve's policy direction and risk sentiment in the second half of the year."

Economists surveyed by Bloomberg expect the U.S. June core CPI year-on-year rate to accelerate to 2.9%, the highest level since February. According to Barclays strategists, June CPI has historically been the month with the greatest absolute surprise in recent years.

If inflation data shows that price pressures have increased following the implementation of Trump's tariff policy, it will further question the possibility of a rate cut in September and may push up yields. Conversely, a mild inflation report could reignite bets on monetary easing.

Significant Discrepancies Within the Federal Reserve, Bond Market in Wait-and-See Mode

Since the rate cut in December, the Federal Reserve has kept borrowing costs unchanged. Fed Chairman Jerome Powell described the current interest rate level as "moderately restrictive," and last month's dot plot indicated that officials expect to cut rates twice before the end of the year.

However, seven officials believe that rates should not be cut until 2025, while ten officials support cutting rates two times or more. Federal Reserve governors Christopher Waller and Michelle Bowman have hinted at a desire to resume rate cuts as early as this month.

Powell has made it clear that officials need more time to assess the impact of tariffs on the economy before considering a rate cut, reflecting the Federal Reserve's cautious stance in the face of pressure for rate cuts from Trump.

Traders lack confidence in the direction of the world's largest bond market, significantly unwinding bullish bets over the past week. The two-year Treasury yield has fluctuated between 3.7% and 4% since early May, and the implied volatility indicator for U.S. Treasuries has fallen from the tariff-driven highs in April to its lowest level in over three years.

However, last week's auctions of 10-year and 30-year Treasuries showed solid demand, which may limit sell-offs in the event of poor inflation data. Bloomberg strategist Alyce Andres pointed out that U.S. Treasury yields are currently at the midpoint of the 2025 range, and "expectations for these data may keep bond rates fluctuating within familiar ranges."

Before the September decision, the Federal Reserve will also receive two CPI data releases. Tracy Chen, a portfolio manager at Brandywine Global Investment Management, believes that "we should be able to see the impact of the trade war in the upcoming inflation report. I don't think the Federal Reserve can cut rates in September. The resilience of the labor market and the bubble risk in the asset market do not provide a reason for a rate cut." She expects the yield curve to steepen, with long-term bonds facing shocks from rising inflation, government spending prospects, and changes in foreign demand.

John Lloyd, Global Head of Multi-Asset Credit at Janus Henderson, stated that even if the next interest rate cut is delayed until after September, it may not disrupt the easing path. "The market is pricing in two rate cuts before December. Will one of them be pushed back? Possibly, but it may just be postponed until the first quarter of next year."

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