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Bond market cuts rate rise odds on US inflation data

Investors trimmed bets on the Federal Reserve raising interest rates again this year after US inflation undershot forecasts for the fourth month running, triggering lower Treasury yields and a weaker dollar.

The odds on another rate increase implied by interest rate futures eased to 40 per cent on Friday, according to Bloomberg data, after fresh data showed that the consumer price index rose an annualised 1.6 per cent in June — down from 1.9 per cent in May and lower than the 1.7 per cent forecast by economists.

US retail sales also unexpectedly fell last month, further damping the chances that policymakers will follow through on its plans to tighten monetary policy by another quarter-point later this year.

While stressing that prices are likely to rise eventually given the strong jobs market, Fed chair Janet Yellen admitted to lawmakers earlier this week that “we are watching inflation very carefully”.

“I do believe part of the weakness in inflation reflects transitory factors but well recognise that inflation has been running under our 2 per cent objective, that there could be more going on there,” she said.

The dimming economic data reignited a rally in Treasury prices, pushing yields lower. The 10-year US Treasury yield fell as much as 6 basis points to 2.28 per cent, the lowest since last month. The drop weighed on banking stocks as they benefit from higher interest rates.

Despite reporting better than expected corporate earnings on Friday, JPMorgan’s shares slipped 1.7 per cent while Bank of America and Wells Fargo — two other big US banks with vast lending operations across the country — both fell by about 2.5 per cent, respectively.

“In the light of Chair Yellen’s comments over inflation, the market is no longer convinced that the Fed will tighten monetary policy again this year,” said David Page, senior economist at Axa Investment Managers.

The University of Michigan’s consumer confidence index also slipped in July but the weak retail sales data were a particularly unwelcome surprise.

“Core” retail sales — excluding cars, building materials, gas and food — have now declined for two months running for the first time since early 2015, noted Gregory Daco, chief US economist at Oxford Economics.

“In all, this was a weak report from the consumer spending front. Consumers are cautious to spend despite the positive backdrop of upbeat job gains, rising — albeit sluggish — wage growth and low interest rates,” he said.

The inflation and retail sales misses triggered dollar declines across the board.

Emerging market currencies, including the South African rand, the Russian rouble and the Brazilian real, enjoyed rises of close to or above 1 per cent, while the dollar index, which measures the greenback against its peers, fell to its lowest level since September.

The pound, which has been supported by a Bank of England debate on raising rates, enjoyed a 1.1 per cent bounce while even the yen, the one major currency that has consistently fallen against the dollar in recent weeks, gained more than half a per cent.