TREASURY WRAP: T-NOTE FUTURES (U6) SETTLE 7 TICKS HIGHER AT 108-29+

T-notes bull steepen after soft CPI while Trump walks back 20% Hormuz fee. 

THE DAY: Treasuries rallied across the curve on Tuesday, with the curve bull steepening after the June CPI report came in softer than expected. Inflation surprised to the downside across the board, with core CPI unchanged on the month versus expectations for a 0.3% increase, while the annual rate eased to 2.6% Y/Y from 2.9%, below even the lowest estimate of 2.8%.

The softer inflation data prompted markets to pare Fed rate hike expectations after Governor Waller warned on Monday that another firm core inflation reading would strengthen the case for a near-term rate hike. Although the report was a welcome development for policymakers, Waller also stressed he would need to see several more benign inflation prints before concluding that inflation is moving sustainably back towards target. Chair Warsh struck a similar tone during his House testimony, emphasising that the Fed would not overreact to a single data point and that the job on inflation was not yet complete.

Nevertheless, money markets pushed back expectations for the next Fed rate hike, with the first fully priced move shifting to December from October before the CPI release. The implied probability of a July hike also fell sharply, with markets now pricing just 4bps of tightening this month compared with around 10bps before the data. Attention now turns to Wednesday's PPI report and its implications for June PCE forecasts. Pantheon Macroeconomics expects core PCE to rise 0.16% M/M, while Oxford Economics looks for a 0.2% increase.

Away from monetary policy, geopolitical tensions remained elevated, although President Trump walked back his proposal to impose a 20% charge on vessels transiting the Strait of Hormuz, instead saying the waterway would remain open to all shipping except Iranian vessels. Meanwhile, military exchanges continued across the region, with reports of strikes in Iran, including on Qeshm Island, alongside attacks on a US military base. Reports also suggested additional commercial vessels were struck in the Strait of Hormuz during the session.

• US Treasury to sell USD 72bln of 17-week bills (prev. USD 72bln) on July 15th, 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
• US sold 6-wk bills at high-rate 3.640%, B/C 2.84x

• Fed Pricing: Dec 27.2bps (prev. 33bps)
• EFFR at 3.62% (prev. 3.62%), volumes at USD 112bln (prev. USD 126bln) on July 13th
• SOFR at 3.60% (prev. 3.55%), volumes at USD 3.096tln (prev. USD 3.056tln) on July 13th
• NY Fed RRP op demand at 0.278bln (prev. 0.795bln) across 4 counterparties (prev. 2) on July 14th.