How are the Fed odds shaping up forward of the CPI report later?

The odds of a rate cut in September are roughly ~85% now with a total of 44 bps worth of rate cuts priced in for the year. But as we look to the US CPI report later, the July odds are perhaps one that is worth keeping an eye out for as well. That is currently seen at a ~34% probability for the Fed to cut.

A softer print on the inflation numbers later coupled with a weaker retail sales data might just be the recipe for traders to start considering a July cut more seriously. And after the reaction yesterday, it certainly is the type of scenario that will supercharge risk appetite in markets. At this point, it really won’t take much for greed to prevail. So, keep that in mind.

I reckon the worst balance of data for the Fed in the months ahead will be if inflation continues to remain sticky while there is a further slowdown in the US economy. That especially if the latter shows up in the labour market too.

That will really test the resolve of the Fed in trying to hold rates higher for longer. Or will they give in and argue that even cutting rates by a little is still holding a more restrictive policy?