The consumer price index (CPI) was released today for June. Both the headline number and core came in 0.1% less than expected. Also, the closely watched subset components of Shelter and Supercore (non-housing services) were less than the month before. None of this sounds very exciting but the 2-year yield has dropped by a large 12 basis points on this news.

This can be explained by the chart below. Shorter-term trends of inflation have now fallen to new cycle lows, proving that the inflation bulge in March/April was temporary. This will be important to the Fed’s confidence that inflation is returning back to 2%.

There is very little holding the Fed back from turning more dovish now (I think this matters more than when the first cut will be), except to not let the market get ahead of them as happened last December. Mary Daly, President of the San Francisco Fed, is the first to say cuts will now be appropriate today.