July Inflation Data Came in as Expected, Lowering the Odds of a Fed Hike in September Yet Again

July inflation data met expectations, with CPI rising 0.1% monthly and 3.4% year-over-year, while core CPI climbed 0.2% monthly and 2.5% annually. The print, combined with recent weaker-than-expected jobs data, pushed market-implied odds of a September Fed rate hike down to 38% from 48%. The probability the Fed holds rates steady in the 3.50%-3.75% range now stands at 62%.

CME (CME), which operates the derivatives markets where these Fed probabilities are priced through fed funds futures, captures direct order flow as traders adjust rate expectations. The July inflation report marks the second consecutive month of cooling price pressures, reinforcing expectations that the Fed's aggressive tightening cycle may be nearing an end. The shift in rate expectations triggers repositioning across interest-rate products, boosting volume in CME's benchmark Treasury futures and eurodollar contracts.

Core CPI's 2.5% annual gain represents the smallest advance since February 2021, providing the Federal Reserve additional justification to pause after ten consecutive rate increases totaling 500 basis points since March 2022.