This was the most eagerly awaited macroeconomic figure of the week. US inflation slowed again in June, with both the core and headline CPI indices rising sequentially by +0.2% (versus 0.3% expected).

On a year-on-year basis, the CPI reached +3% against expectations of +3.1%, the lowest level since March 2021. The core CPI is now +4.8% year-on-year, compared with +5% expected.

This marks the 12th consecutive month of year-on-year declines in headline CPI, the longest streak of declines in history (since 1921).

Following the publication of lower-than-expected CPI and PPI figures, US interest rate futures now give a 94% probability of a rate hike at the Fed's July meeting. The yield curve points to a possible first rate cut in January 2024 (40% probability).

Before the release of the inflation figures, the market was not expecting a rate cut before March. 

Will the Fed bow to market expectations and signal its willingness to implement a less restrictive monetary policy?

Treasury yields fell significantly over the week. In fact, this was the biggest weekly fall in yields since March. Note that the fall in yields was more marked on the short end than the long end.  There is one paradox, however: 10-year yields are at roughly the same level as they were when inflation was at 9%. 

The behaviour of the S&P 500 following the bear market of 2022 is very different from what was seen in 2000-2002 and 2007-2009. The chart below compares the index's performance since the market peak (January 2022 for the current cycle). The S&P 500 is now 3% higher than it was when the Fed began raising rates in March 2022.

Is this the biggest risk for bears? As Goldman has pointed out, there is a $5 trillion 'gap' between the flow of funds into money markets and bonds, on the one hand, and equities, on the other. As investors realise that the much-feared recession will not happen, they may be inclined to return to risky assets. 

The dollar's weakness continues to have an impact on the markets. The euro, Swiss franc, pound and yen all appreciated against the dollar last week following the publication of US inflation figures. The dollar index has fallen for five of the last six days, recording its second biggest weekly fall (-2%) since March 2020. The Bloomberg Dollar Index has returned to its levels prior to the COVID crisis. 

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