Traders Lower Fed Rate Hike Expectations Amid Cooling Inflation and Oil Prices

Bond traders have adjusted their expectations for a Federal Reserve interest rate hike this year, influenced by falling oil prices and recent inflation data indicating a cooling trend. Treasury yields dropped by as much as six basis points across various maturities, with long-term yields experiencing a smaller decline following the US's sale of $25 billion in new 30-year bonds.

Oil prices fell over 3.5% at one point on Thursday before recovering slightly, reinforcing investor optimism that US inflation may have peaked. This shift in sentiment follows weak employment data from July, which led traders to reassess the likelihood of tighter monetary policy. Recent government reports showed a slowdown in producer prices for July, while consumer price data from earlier in the week also indicated a second consecutive month of cooling inflation.

Currently, markets estimate the probability of a rate increase in September to be below 40%, with December contracts reflecting about 23 basis points of tightening, just shy of a full quarter-point move. However, some Federal Reserve officials, including Cleveland Fed President Beth Hammack, maintain that higher rates may still be necessary as inflation remains above the central bank's 2% target.

In related commentary, Jeremy Siegel, senior economist at WisdomTree, suggested that the Fed is unlikely to raise rates in September if oil prices remain around $80 per barrel. He noted that recent inflation reports have lowered the odds of a hike, with Goldman Sachs revising its forecast for the Personal Consumption Expenditures (PCE) price index, the Fed's preferred inflation measure, to a modest 0.2% increase for the month.