US June CPI Falls to 3.5% vs 3.8% Expected, Core Flat at 0.0% M/M

The US June CPI report delivered a significant downside surprise, with headline inflation dropping to 3.5% year-over-year versus the 3.8% consensus and well below the prior 4.2%. Monthly CPI fell 0.4% against expectations of -0.1%, with an unrounded reading of -0.349%. Core inflation was equally soft, printing at 2.6% y/y versus 2.8% expected and down from 2.9% prior, while the monthly core reading was flat at 0.0% against the +0.2% forecast (unrounded +0.011%). The data has sent immediate shockwaves through rate markets. Prior to the release, Fed funds futures had priced in 9.2 basis points of hikes at the July 29 meeting and 41 bps through year-end. Post-release, those expectations have fallen sharply as markets reassess the Federal Reserve's tightening path. Traders are simultaneously processing comments from Fed Governor Warsh, creating additional volatility. The dollar has weakened across the board as the inflation trajectory increasingly supports a pause or potential end to the hiking cycle.