Cooling Inflation Data Prompts Bond Traders to Unwind Fed Rate Hike Bets
0xBroomberg
Two consecutive below-forecast inflation prints are driving a rapid unwind of Fed rate-hike bets in the options market; the implied probability of a July hike has plunged from ~40% to ~16%, as pricing shifts from 'at least two hikes' to 'possibly none at all.'
What did the two prints actually show?
U.S. June CPI and PPI, released Tuesday and Wednesday, both came in below economist forecasts — price gains are cooling further.
This means → the "inflation rebound" scenario that had driven hike bets has lost its data footing, forcing a repricing of the Fed's policy path.
Why did the hike probability collapse?
Interest-rate swaps — contracts used to bet on the direction of future rates — now price the implied probability of a hike at the July 29 FOMC meeting at roughly 16%, down from about 40% at the start of the week. That translates to only about 4 basis points of tightening.
The December contract's implied full-year tightening fell from 43 basis points to roughly 29 basis points.
In plain terms = in one week, the market went from "hikes are a certainty this year" to "there may not be a single one."
Who is exiting in the options market?
In the SOFR options market — tied closely to the Fed's policy rate — put options expiring in September and December have been under sustained selling pressure.
Wednesday's activity pushed open interest lower, signaling that sellers are closing existing positions, not opening new short bets.
This means → traders are not flipping to bet on cuts; the ones who bet on hikes are taking losses and walking away.
What do economists make of it?
Natixis chief U.S. economist Christopher Hodge said: "Two consecutive sharp misses below consensus and a more optimistic inflation outlook suggest the current policy stance may already be restrictive enough."
In plain terms = rates may already be high enough — no further hike needed.
What could flip the script?
Oil prices are the biggest wild card. Since the collapse of the U.S.–Iran ceasefire, crude has risen steadily over the past week, partially offsetting the downward pressure on Treasury yields from the softer inflation data.
This means → if oil climbs further, reflation risk could reactivate hedging demand for hikes — the current "no hike" consensus is far from settled.
Content is for reference only, not financial advice.