U.S. Consumer Prices Fall 0.4 Percent in June, Largest Monthly Drop Since April 2020

The U.S. consumer price index fell 0.4 percent in June on a monthly basis, the largest single-month decline since April 2020. The year-over-year rate came in at 3.5 percent, below the Dow Jones consensus forecast of 3.8 percent.

U.S. equities rose in early trading after the report while Treasury yields declined. The CME Group's FedWatch tool showed the probability of a July Federal Reserve rate hike at 17 percent, down from 42 percent on Monday.

Traders assigned a 63 percent probability that the Federal Reserve target rate would rise by a quarter or half percentage point after the September FOMC meeting. The current neutral federal funds rate stands at 3.75 percent. Kay Haigh, global head and CIO of Fixed Income and Liquidity Solutions at Goldman Sachs Asset Management, said the print lowers pressure on the Fed to hike soon but noted that renewed hostilities in Iran keep the prospect of increases open.

Christopher Rupkey, chief economist at FWDBonds, said rate hikes can be taken off the table for now because the neutral rate balances upside and downside risks. Ryan Weldon, investment director at IFM Investors, said the report did not provide the clarity markets expected despite the headline miss and pointed to focus on core prices amid recent hawkish Fed commentary.

Josh Jamner, senior investment strategy analyst at ClearBridge Investments, said the data pours cold water on near-term rate hikes and should lift risk assets as yields fall.

Skyler Weinand, chief investment officer at Regan Capital, said the weaker print suggests the inflation surge tied to the Iran war is fading but may prove temporary. Jason Pride, chief of investment strategy and research at Glenmede, said June offers the clearest evidence yet that the energy shock has not seeped into the rest of the CPI basket.