TREASURY WRAP: T-NOTE FUTURES (U6) SETTLE 12 TICKS HIGHER AT 109-09+

T-notes continued to bull steepen after PPI added to the soft inflation narrative. At settlement, 2-year -6.5bps at 4.126%, 3-year -6.8bps at 4.175%, 5-year -6.4bps at 4.253%, 7-year -5.7bps at 4.390%, 10-year -4.2bps at 4.545%, 20-year -3.0bps at 5.078%, 30-year -2.0bps at 5.082%.

THE DAY: Treasuries rallied across the curve on Wednesday, with the front end outperforming after another softer-than-expected inflation report reinforced the benign CPI data released on Tuesday. Both headline and core PPI came in below expectations, further reducing the perceived need for near-term Fed rate hikes. The PPI components feeding into the PCE inflation measure also leaned softer, with economists now generally expecting monthly core PCE to print around 0.2%. Elsewhere, the NY Fed Empire Manufacturing survey exceeded expectations, driven by a sharp rise in new orders, while the employment component improved and price pressures eased.

Energy prices were choppy, ultimately settling firmer amid ongoing military exchanges between the US and Iran, as both sides continue to avoid targeting energy infrastructure. President Trump warned that Iran's bridges and power plants would be the next targets should Tehran refuse to return to negotiations, adding that energy infrastructure would be targeted only as a last resort. Meanwhile, Iranian Parliamentary Speaker and chief negotiator Ghalibaf stated that Iran was prepared to use both diplomacy and military means to secure its national interests, perhaps signalling a willingness to return to negotiations.

Fed commentary generated little additional market reaction. Chair Warsh's testimony before the Senate largely echoed his remarks to the House a day earlier, reiterating the Fed's commitment to price stability while avoiding any explicit forward guidance. New York Fed President Williams maintained that policy remains well-positioned, although he stressed that there is currently no clear indication of the future direction or timing of interest rate moves.

Attention turns to US Retail Sales on Thursday.

• US sold 17-wk bills at high-rate 3.745%, B/C 3.35x
• US Treasury to sell USD 110bln of 4-week bills (prev. USD 100bln) and USD 100bln of 8-week bills (prev. 95bln) on July 16th; to settle July 21st

• Fed Pricing: Dec 25.1bps (prev. 27.2bps)
• EFFR at 3.63% (prev. 3.62%), volumes at USD 111bln (prev. USD 112bln) on July 14th
• SOFR at 3.63% (prev. 3.60%), volumes at USD 3.092tln (prev. USD 3.096tln) on July 14th
• NY Fed RRP op demand at 0.15bln (prev. 0.28bln) across 2 counterparties (prev. 4) on July 15th