Key Takeaways:
BofA sees Treasury yields and the dollar reacting more sharply to a soft July CPI print than to an equally strong one, with a 0.1% core reading effectively ending September hike odds.
A soft July core CPI reading would carry more weight for Treasury yields and the dollar than an equally strong one, BofA Securities said, with a 0.1% monthly print effectively ruling out a September Federal Reserve hike.
"The asymmetric response reflects positioning and the cautious tone of Fed Chair Kevin Warsh," analysts led by Meghan Swiber, rates strategist at BofA Securities, wrote in a preview of Wednesday's release. "We expect U.S. rates and the dollar to react more to a downside surprise than to an equal-sized upside surprise."
BofA forecasts headline CPI rising 0.1% month on month and 3.4% year on year, with core CPI up 0.2% monthly and 2.5% annually — the lowest reading since January. The forecast follows June's 0.4% monthly drop in headline CPI, the first decline since April 2020, when a 5.7% slide in energy prices and a 9.7% plunge in gasoline pulled the annual rate back to 3.5% from 4.2%. Core services, including shelter, are expected to rebound to trend of about 0.3% monthly.
The stakes are high because markets price roughly a 50 percent chance of a 25 basis point hike at the Fed's Sept. 16 meeting. A core print of 0.3% monthly would put a September hike back on the agenda but not lock it in, since August data and Warsh's cautious stance leave the decision open. A 0.1% reading would push September out of play and challenge the roughly 30 basis points of tightening priced for the year.
The asymmetry is sharpest in the rates market. CTA and active bond funds hold large short-duration positions, with shorts concentrated at the front end, so a soft print would force short covering and drive a bull-steepening of the yield curve that amplifies the move lower. The Bloomberg Fed sentiment index also shows officials leaning mildly hawkish, meaning there is more room for policymakers to turn dovish on weak data than to turn more hawkish on strong data.
The dollar faces a similar dynamic. Since Warsh took office, the greenback has tracked Fed hike expectations through a full round trip, and dollar futures positioning remains net long while options skew sits near neutral — a structure that points to larger downside on a soft print. A strong reading would recover only part of recent losses, capped by uncertainty over August data and Warsh's intentions.
BofA laid out three scenarios for core PCE, the Fed's preferred gauge, over the next two months. An average of 25 basis points or more would make a September hike near-certain, keeping core PCE above 3 percent even after methodological revisions. An average below 20 basis points would end September hike odds, though BofA still sees higher rates needed later in the year to push underlying inflation back to 2 percent. A 20-to-25 basis point range leaves the decision a coin flip, hinging on whether Warsh's recent hawkish tone is genuine or a continuation of his dovish July press conference.
The release lands as FX volatility sinks and carry trades stay in demand, with the dollar index trading in a 99.50-100.00 range and EUR/USD confined to 1.1515-1.1560. Gold, near $4,398, faces two-way risk, with a soft core print supporting a push toward the $4,500.55 200-day moving average and a hot reading risking a pullback toward $4,300.
This article is for informational purposes only and does not constitute investment advice.
