Low inflation adds to reasons for Fed to cut rates
The Fed is in an awkward spot. It has already started pivoting to making rate cuts contingent on an escalation in the US-China trade war yet it might find itself needing to lower rates anyway. Inflation has persistently undershot Fed forecasts and there is a decided risk that it continues in that direction and undercuts credibility and inflation expectations.
The market priced more of that in after today's CPI report. It showed prices up 1.8% y/y, which is a three-month low. Perhaps more importantly, the past four months have averaged about 0.13% which is 1.57% annualized.
The US 2-year yield fell to 1.87% after the report from 1.90% in a sign of potential rate cuts. The US dollar also fell a dozen pips across the board before mostly rebounding. That bounce might be a reflection of specs covering USD shorts that have struggled to gain momentum. FX is caught between bonds and stocks at the moment as they send entirely different signals about what's coming next.