Inflation Cools as CPI and PPI Decline in June

This week’s economic data includes: (1) Consumer Price Index (CPI) for June, (2) Producer Price Index (PPI) for June, (3) weekly initial jobless and continuing claims and (4) market trends across equities, oil and Treasury markets along with rate-cut expectations.

 

KEY SUMMARY:

June’s consumer inflation report delivered welcome relief, with cooler-than-expected price pressures across goods, services, and housing helping ease near-term Fed tightening concerns, although rising oil prices from renewed Middle East tensions could challenge that progress in the months ahead.

June’s CPI report was a welcome surprise, showing inflation cooled more than expected. Consumer prices fell 0.4% during the month—the largest decline since April 2020—primarily driven by a sharp drop in gasoline prices. Core inflation was also subdued, with both goods and services showing broad-based moderation. Particularly encouraging was shelter inflation, which posted its smallest monthly increase since early 2021, suggesting one of the most persistent sources of inflation is finally easing.

 

The softness was evident across much of the report. Energy prices fell nearly 6% as gasoline prices declined almost 10%, while core goods prices continued to experience mild deflation. Food inflation remained relatively contained, and service-sector inflation slowed meaningfully as travel, lodging, insurance, and delivery costs moderated. As a result, both headline and core CPI came in below market expectations, reinforcing the view that inflation pressures are gradually moving in the right direction.

 

For the Federal Reserve, the report provides some breathing room and reduces the urgency for additional rate hikes in the near term. However, the inflation outlook remains uncertain. Since the June data was collected, renewed Middle East tensions have pushed oil prices sharply higher, raising the risk that energy costs could begin feeding back into consumer prices. While June’s report was clearly encouraging, future inflation readings will likely depend on whether rising energy prices become a temporary shock or a more sustained inflationary pressure.

 

June’s wholesale inflation report provided further evidence that inflation was cooling, as falling energy prices and moderating wholesale costs pushed producer inflation below expectations, reinforcing hopes for a patient Fed while highlighting the risk that renewed Middle East tensions and higher oil prices could reignite inflation pressures in the months ahead.

June’s PPI report delivered another encouraging sign that inflation pressures were easing before the recent resurgence in energy prices. Wholesale prices fell 0.3% during the month, well below expectations, marking the first monthly decline since April 2025. Much of the improvement came from a sharp drop in energy prices, particularly gasoline, which helped drive the largest monthly decline in goods prices in nearly four years.

 

Beneath the surface, inflation trends were generally favorable. Food prices declined modestly, core goods inflation remained contained, and services inflation showed signs of moderation. While some sectors, such as retail trade margins, saw price increases, underlying services excluding trade, transportation, and warehousing rose only 0.1%, suggesting that broader inflation pressures continue to cool. Even technology-related pricing remained mixed rather than broadly inflationary.

 

Taken together with the softer CPI report, the June PPI data reinforces the view that inflation was moving in the right direction heading into the July FOMC meeting. The combination of lower headline inflation and subdued core readings effectively removed the likelihood of a near-term Fed rate hike and supported a more patient policy stance. However, the recent surge in oil prices tied to escalating Middle East tensions remains a key risk, as higher energy costs could reverse some of the inflation progress seen in June.

 

Consumers continued to power the economy in June, with retail sales posting a fifth straight monthly gain and underlying demand remaining resilient, although rising gasoline prices, fading temporary spending boosts, and low savings rates could lead to a slower pace of consumer spending in the months ahead.

Retail sales continued to show resilience in June, rising 0.2% and marking a fifth consecutive monthly increase. While growth slowed from May’s strong pace, consumers continued to spend on vehicles, online purchases, and recreational goods, supported by a healthy labor market, steady wage growth, and strong household wealth effects from the stock market. Lower gasoline prices also provided consumers with some additional spending power, helping offset broader economic headwinds.

 

Beneath the surface, the report suggests consumer demand remains solid but is gradually moderating. Core retail sales and the closely watched control group, which feeds directly into GDP calculations, both posted gains, indicating spending remains healthy beyond volatile categories such as autos and gasoline. However, with gasoline prices moving higher again due to renewed Middle East tensions, the impact of tax refunds and World Cup-related spending fading, and savings rates remaining low, consumer spending could face greater challenges in the third quarter despite its current resilience.

 

The labor market remains on solid footing, as weekly jobless claims fell to their lowest level since May and weekly continuing claims declined, signaling that layoffs remain limited, hiring conditions are stable, and employers continue to hold onto workers despite broader economic uncertainty.

The labor market continues to show remarkable resilience, with both initial and continuing jobless claims declining and remaining well below year-ago levels. Initial claims fell to their lowest level since May, while continuing claims also came in below expectations, indicating that layoffs remain limited and displaced workers are generally finding employment. Combined with the Fed’s latest Beige Book, which reported stable to improving employment conditions across most regions, the latest data suggests the labor market remains healthy and continues to provide solid support for consumer spending and overall economic growth.

 

Markets turned more cautious this week as rising Middle East tensions pushed oil prices higher and challenged the inflation outlook, while growing competition from lower-cost Chinese AI models raised questions about the sustainability of the AI-driven investment boom, even as softer inflation data led investors to scale back expectations for additional Fed rate hikes.

Equity markets pulled back this week as investors navigated two major concerns. First, escalating tensions in the Middle East sent oil prices sharply higher, raising fears that energy-driven inflation could reemerge. Second, enthusiasm around artificial intelligence cooled after China’s Moonshot AI unveiled its open-source Kimi K3 model, which reportedly outperformed some leading U.S. models in selected coding benchmarks. The development prompted investors to question whether the massive investments and lofty valuations supporting the AI boom can be sustained, as increasingly capable and lower-cost open-source models could weaken the pricing power of U.S. AI leaders and reduce demand for the computing infrastructure that has fueled record spending on data centers and semiconductors.

 

The pressure was felt most acutely in technology and AI-related stocks, leading the Nasdaq to decline 2.9% for the week, while the S&P 500 fell 1.6% and the Dow Jones Industrial Average slipped 0.9%. Despite the weekly selloff, all major indexes remain solidly positive for the year, reflecting continued confidence in the broader economy and corporate earnings. However, the market’s reaction highlights how sensitive investors remain to both geopolitical risks and shifts in the AI competitive landscape.

 

Energy markets were at the center of the week’s volatility. Concerns over potential supply disruptions in the Middle East pushed Brent crude up nearly 16% to $88 per barrel and West Texas Intermediate (WTI) up more than 15% to $82 per barrel. Futures prices also moved higher through 2027, suggesting that markets expect geopolitical risks to remain elevated for some time. Consumers are already feeling the impact, with the national average gasoline price rising to $3.98 per gallon, while California drivers continue to face particularly high prices at $5.20 per gallon.

 

Meanwhile, the bond market took a more constructive view of the inflation outlook. Softer-than-expected CPI and PPI reports helped push Treasury yields modestly lower and reduced expectations for additional Federal Reserve tightening. Investors pushed expectations for the next potential Fed rate hike from September to October and significantly lowered the likelihood of further rate increases thereafter. While markets still expect rates to remain elevated, the shift in rate expectations and the modest decline in forward Treasury rates suggest growing confidence that inflation pressures are easing, resulting in a slightly less hawkish Fed outlook than just a week ago, despite lingering inflation concerns driven by escalating conflicts in the Middle East and their potential impact on energy prices.

 

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DETAILED ANALYSIS:

CPI – June Update: 

The Bureau of Labor Statistics (BLS) reported that consumer prices declined 0.4% month over month in June, down from a 0.5% increase in May and well below market expectations of a 0.1% decline. This marked the largest monthly drop in consumer prices since April 2020 and was driven primarily by a sharp decline in gasoline prices, the steepest since August 2022.

 

Key contributors to the monthly decline included:

• Gasoline: -97.6%
  • Wireless telephone services: -10.4%
  • Apparel: -3.3%

 

On a year-over-year basis, CPI increased 3.5% in June, down from 4.2% in May and below the consensus estimate of 3.8%.

 

Food Prices

Food inflation remained moderate in June. Overall food prices, which include both groceries and dining out, increased 0.2% month over month, unchanged from May. Grocery prices rose 0.2%, up from 0.1% in May, with four of the six major food categories registering increases.

 

Notable increases included:

• Dairy products: +1.2% (milk +2.0%, cheese +2.8%)
• Meats, poultry, fish, and eggs: +0.6% (beef +1.2%)
• Other food: +0.5% (sugar and sweets +0.6%, salad dressing +3.4%)
• Cereals and bakery products: +0.3% (rice, pasta and cornmeal +1.6%)

 

Egg prices rose 4.3% month-over-month but remain sharply lower year-over-year (-27.9%).

 

Categories posting declines included:

• Fruits and vegetables: -0.2% (tomatoes -10.0%)
• Nonalcoholic beverages: -1.5% (juices and nonalcoholic drinks -1.2%, coffee -2.0%)

 

Food away from home increased 0.2% in June, down from 0.3% in May. On an annual basis, food inflation eased to 3.0%, with grocery prices up 2.7% and restaurant prices rising 3.4%.

 

Energy Prices

Energy prices—which include both energy commodities and energy services—declined 5.7% month over month in June following a 3.9% increase in May. The drop was driven primarily by lower energy commodity prices, including a 9.7% decline in gasoline prices, a 9.2% decrease in fuel oil prices, and a 1.5% decline in propane, kerosene, and firewood prices.

 

Among energy services, natural gas prices rose 0.5% during the month, while electricity prices declined 1.0% after increasing 0.6% in May.

 

Despite the monthly decline, energy prices remained up 15.7% year over year, largely reflecting higher gasoline and fuel oil prices.

 

Core Goods Prices (Excluding Food & Energy)

Core goods prices declined 0.1% in June for the second consecutive month, with price declines recorded across most categories. The broad-based weakness suggests that tariff-related pricing pressures may likely be over.

 

Categories posting declines included:

• Household furnishings: -0.1%
• Apparel: -0.6%
• Transportation commodities: -0.1%
• Medical care commodities: -0.2%
• Education and communication commodities: -0.8%
• Other goods: -0.2%

 

Notable declined items included:

• Appliances: -1.5%
• Personal computers and peripheral equipment: -0.7%
• Photographic equipment and supplies: -2.7%
• Cigarettes: -0.5%
• Stationery: -0.7%

 

Used vehicle prices fell 0.2% in June, while new vehicle prices were unchanged following two consecutive monthly declines.

 

On a year-over-year basis, core goods prices increased 0.8%, down from 1.1% in May. Notable annual changes included apparel (+3.9%), sporting goods (+4.5%), and information technology equipment (-7.2%).

 

Core Services Prices (Excluding Energy)

Core services prices were unchanged in June, slowing from a 0.3% increase in May. The moderation was largely attributable to softer shelter inflation. Shelter, which accounts for approximately 35% of the CPI basket, increased just 0.1% during the month—the smallest gain since January 2021—down from 0.3% in May.

 

Other notable monthly changes included:

• Airline fares: +0.2% (vs. +2.7% in May)
• Car and truck rentals: +5.1% (vs. -4.2% in May)
• Hotels and motels: -2.8% (vs. +0.5% in May)
• Motor vehicle insurance: -2.0% (vs. -1.7% in May)
• Delivery services: -0.3% (vs. +2.6% in May)
• Physician services: -0.2% (unchanged in May)
• Cable, satellite, and streaming services: +0.7% (vs. +0.4% in May)

 

On a year-over-year basis, core services inflation slowed to 3.2% from 3.4% in May. Shelter inflation eased to 3.3%, while notable annual increases were observed in airline fares (+26.5%), delivery services (+14.8%), recreation services (+2.7%), and medical care services (+2.9%).

 

Core CPI (Excluding Food & Energy)

Core CPI was unchanged in June, down from a 0.2% increase in May and below market expectations of 0.2%. On a year-over-year basis, core CPI rose 2.6%, down from 2.9% in May and below the consensus estimate of 2.8%.

 

Commentary

June’s inflation report was significantly softer than expected and provided encouraging evidence that price pressures were moderating across both goods and services. Lower gasoline prices, driven in part by the temporary easing of Middle East tensions during June, helped bring headline inflation sharply lower, while shelter inflation posted its weakest monthly increase in more than four years. The combination of softer headline and core inflation should provide the Federal Reserve greater flexibility at its upcoming meeting and reduce the urgency for additional policy tightening.

 

However, the improvement may prove temporary. Renewed hostilities in the Middle East have already pushed oil and gasoline prices higher in July, raising the risk that energy costs could once again become a source of inflation pressure in the months ahead. As a result, while the June report was clearly constructive, the inflation outlook remains highly dependent on geopolitical developments and their impact on energy markets.

 

PPI – June Update: 

The BLS reported that the PPI for final demand declined 0.3% month over month in June, below market expectations of no change and down from a revised 0.6% increase in May. This marked the first monthly decline since April 2025 and reflected a meaningful easing in wholesale inflation pressures.

 

The decline was driven almost entirely by lower goods prices, particularly energy, which accounted for more than the total decline in headline PPI. On a year-over-year basis, headline PPI increased 5.5%, below market expectations of 6.2% and down from a revised 6.0% in May.

 

Goods Prices

Goods prices, which include food and energy, declined 1.4% month over month in June following a 2.3% increase in May, marking the largest monthly decrease since July 2022.

 

The decline was driven primarily by energy prices, which fell 6.4% and accounted for virtually all of the decrease in goods inflation. Gasoline prices dropped 12.0%, representing nearly two-thirds of the overall decline. Additional weaknesses were seen in diesel fuel, jet fuel, and liquified natural gas.

 

Food prices declined 0.6% in June, posting their first monthly decline in three months. Notable decreases included:

 

• Fresh fruits and melons: -2.2%
• Fresh and dry vegetables: -6.0%
• Grains: -12.0%
• Beef: -1.5%
• Eggs: -1.7% (fourth consecutive decline)

 

Excluding food and energy, core goods prices increased 0.2% month over month in June, down from 0.7% in May.

 

Technology-related pricing was mixed:

• Electronic components and accessories: -0.5% MoM (+27.6% YoY), declining for two consecutive months
• Computers and related equipment: +0.2% MoM (+12.7% YoY)

 

Services Prices 

Services prices increased 0.2% month over month in June, rebounding from a 0.1% decline in May. The increase was primarily driven by higher trade service margins received by wholesalers and retailers.

 

Key components included:

• Trade services: +0.4% (vs. -2.3% prior month), led by fuels and lubricants retailing (+13.0%) and furniture retailing (+10.9%)
• Transportation and warehousing: -0.1% (vs. +2.0% prior month), reflecting declines in airline passenger services (-0.4%) and courier, messenger and US postal services (-0.5%)
• Portfolio management: +0.5% (vs. +4.8% prior month), showing a significant slowdown from the prior month

 

Services excluding trade, transportation, and warehousing rose just 0.1% month over month in June, down from 0.7% in May, suggesting underlying service-sector inflation continued to moderate.

 

Core and Super Core PPI

Core PPI, which excludes food and energy, increased 0.2% month over month in June, slightly above May’s 0.1% increase but below market expectations of 0.3%. On a year-over-year basis, core PPI rose 4.7%, modestly above May’s 4.6% reading but below the consensus estimate of 5.1%.

 

Super Core PPI, which excludes food, energy, and trade services, increased just 0.1% in June, slowing sharply from 0.8% in May and coming in below expectations of 0.3%. On a year-over-year basis, Super Core PPI held steady at 5.1%, below the expected 5.2%.

 

Commentary

Similar to the June CPI report, wholesale inflation came in softer than expected, driven largely by lower energy prices and moderating underlying price pressures. The broad-based slowdown in both headline and core measures suggests inflation was continuing to ease before the recent escalation of Middle East tensions and the subsequent rebound in oil prices.

 

Combined with the softer CPI report, June’s PPI data reinforces the view that inflation trends were moving in the right direction heading into the July FOMC meeting. As a result, the data effectively removes any likelihood of a rate hike at this month’s meeting and supports a more patient Fed stance, although renewed energy price pressures could complicate the inflation outlook in the months ahead.

 

Retail Sales – June Update:

Overview:

Retail sales increased 0.2% month over month in June, slowing from a revised 1.0% gain in May but matching market expectations. The modest increase was largely driven by strong sales at auto dealerships and online retailers, which more than offset a sharp decline in gasoline station sales resulting from lower fuel prices. On a year-over-year basis, retail sales rose 6.7%, down slightly from 7.3% in May.

 

June marked the fifth consecutive month of retail sales growth, supported by a resilient labor market, steady wage gains, and continued spending by higher-income households benefiting from strong equity market performance. The report suggests that lower gasoline prices—driven by the temporary easing of Middle East tensions in June—provided consumers with additional spending power for discretionary purchases. However, with gasoline prices rising again amid renewed geopolitical tensions, fading support from tax refunds and World Cup-related spending, and a still-low personal savings rate, consumer spending could soften in the third quarter.

 

Category Performance:
Seven of the thirteen major retail categories posted monthly gains, while one category was unchanged.

 

Notable gains included:

 

• Motor vehicle and parts dealers: +1.9% MoM (+5.7% YoY), accounting for 157% of the overall monthly increase
• Non-store retailers: +1.9% MoM (+14.2% YoY), contributing 161% of the monthly increase and extending a six-month gaining streak, supported in part by Amazon’s four-day Prime Day event and competing promotional campaigns from other retailers
• Sporting goods, hobby, musical instrument, and book stores: +1.3% MoM (+15.2% YoY), contributing 7.3% of the monthly increase

 

Meanwhile, food services and drinking places, the only services category in the report, rose a modest 0.1% in June, slowing from a revised 1.2% increase in May, which was likely boosted by World Cup-related spending and dining activity.

 

Building materials and garden equipment stores, electronics and appliance stores, and general merchandise retailers also posted modest gains during the month.

 

These increases were partially offset by weakness in a few categories, most notably:

 

• Gasoline stations: -5.3% MoM (+19.8% YoY), reflecting lower fuel prices and reversing four consecutive monthly increases
• Health and personal care stores: -0.8% (+0.2% YoY)

 

Smaller declines were reported in food and beverage stores and miscellaneous retailers, while sales at furniture and home furnishing stores were essentially unchanged.

 

Core Retails & Control Group:
Core retail measures show increased but lower than prior month:

 

• Retail sales excluding gasoline increased 0.7% MoM, down from 0.9% in May
• Retail sales excluding autos decreased 0.2% MoM, down from 1.0% and below expectations of -0.1%
• Retail sales excluding autos and gasoline increased 0.4%, down from 0.8% in May and in line with expectations

 

These readings suggest underlying consumer demand continued to remain resilient, even after adjusting for volatility in autos and gasoline.

 

The control group—which excludes food services, autos, building materials, and gasoline and feeds directly into GDP—rose 0.5% MoM in June, down from 0.8% in May and in line with expectations.

 

Core retail sales measures continued to indicate healthy consumer activity, although growth moderated from May’s pace:

• Retail sales excluding gasoline: +0.7% MoM, down from +0.9%
• Retail sales excluding autos: -0.2% MoM, down from +1.0% and slightly weaker than expectations
• Retail sales excluding autos and gasoline: +0.4% MoM, down from +0.8% and in line with forecasts

 

These figures suggest that underlying consumer demand remained resilient even after adjusting for volatility in auto and gasoline sales.

 

The closely watched control group, which feeds directly into GDP calculations and excludes food services, autos, gasoline, and building materials, increased 0.5% in June, down from 0.8% in May but consistent with expectations. Overall, the report points to continued consumer resilience.

 

Weekly Jobless Claims – Week Ending July 11:

The Labor Department reported that initial jobless claims declined by 8,000 to 208,000 for the week ending July 11, down from 216,000 the prior week (revised up from 215,000) and below expectations of 217,000 and the lowest level since May. Claims have remained below year-ago levels for a 22nd consecutive week. The four-week moving average edged down by 4,750 to 214,250, indicating layoffs remain limited and businesses are generally retaining workers despite ongoing economic uncertainty. This view was reinforced by the Fed’s Beige Book released last Wednesday that employment rose on balance, with five Districts showing modest, moderate, or solid gains in employment, and with seven Districts experiencing little to no change.

 

Continuing claims, which measure the number of individuals receiving unemployment benefits, fell by 16,000 to 1.805 million for the week ending July 4, coming in below expectations and remaining well below year-ago levels. The insured unemployment rate held steady at 1.2%, while the four-week moving average of continuing claims remained relatively stable at 1.811 million. Taken together, the latest claims data point to a labor market that remains healthy and stable, with few signs of meaningful deterioration in employment conditions.

 

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WEEKLY MARKET ANALYSIS:

Equity Market

Equity markets declined during the week, driven by a combination of escalating U.S.-Iran tensions that pushed oil prices sharply higher and growing investor concerns about whether future AI earnings growth can justify the sector’s elevated valuations. Sentiment weakened further after Beijing-based startup Moonshot AI claimed its new open-source model, Kimi K3, outperformed certain leading U.S. models, including Anthropic and OpenAI, on selected coding benchmarks. The announcement renewed questions about the sustainability of the competitive advantages enjoyed by U.S. AI leaders and the massive capital spending plans that have fueled the recent AI-driven market rally. Investors also focused on the implications of increasingly capable, lower-cost open-source AI models, which could potentially reduce the pricing power of frontier AI providers and lessen demand for the substantial computing infrastructure underpinning record investments in data centers and semiconductors. As a result, technology and AI-related stocks came under pressure, weighing heavily on broader market indexes.

 

Weekly and Year-To-Date (YTD) Performance Highlights:

• Nasdaq: -2.90% (weekly) & +9.80% (YTD), closing at 25,520
• S&P 500: -1.55% (weekly) & +8.94% (YTD), ending at 7,458
• Dow Jones Industrial Average: -0.93% (weekly) & +8.50% (YTD), closing at 52,146
• Russell 2000: -0.52% (weekly) & +19.35% (YTD), ending at 2,962

 

Oil Market and Gasoline Price

For the week ending July 17, 2026, crude oil prices moved sharply higher as escalating geopolitical tensions in the Middle East raised concerns over global oil supplies and potential disruptions to tanker traffic through the Strait of Hormuz. Brent crude increased $12.09, or 15.9%, to $88.10 per barrel, while West Texas Intermediate (WTI) gained $11.08, or 15.5%, to $82.49 per barrel.

 

In the futures market, December 2026 Brent crude settled at $83.17 per barrel, up $7.67, or 10.2%, from the prior week, while December 2026 WTI rose $7.03, or 10.0%, to $77.65 per barrel. Although both contracts continued to trade below spot prices, with Brent and WTI discounted by approximately $4.90 per barrel, the sizable weekly increases suggest that markets expect supply risks and geopolitical uncertainty to persist into next year.

 

Further out the curve, December 2027 futures also advanced, with Brent rising $3.41, or 4.7%, to $75.52 per barrel and WTI increasing $2.88, or 4.3%, to $70.68 per barrel. While these contracts remain below current spot levels, futures prices continue to reflect a meaningful geopolitical risk premium and remain well above the low-$60-per-barrel range that prevailed before the Middle East conflict intensified earlier this year.

 

On the consumer side, the national average gasoline price increased $0.10 to $3.98 per gallon, according to AAA. Despite easing from recent highs, gasoline prices remain elevated, up $1.00, or 33.4%, from the $2.98-per-gallon level recorded before the onset of the Middle East conflict in late February 2026.

 

According to the Department of Energy, California’s average price for regular gasoline increased $0.03, or 0.6%, to $5.20 per gallon for the week ending July 13. Despite the modest weekly increase, prices remain significantly above pre-conflict levels, up $0.73, or 16.2%, from $4.48 per gallon. The increase underscores the continued impact of elevated crude oil prices and regional supply constraints, leaving California motorists particularly vulnerable to further energy market disruptions.

 

Treasury Market

For the week ending July 17, Treasury yields moved slightly lower across the curve, primarily driven by cooler-than-expected June consumer and producer inflation reports. These declines were partially offset by renewed inflation concerns stemming from higher oil prices. The benchmark 10-year Treasury yield fell 1 basis point week over week to 4.55%, while the policy-sensitive 2-year Treasury yield, which serves as a proxy for the average expected federal funds rate over the next two year, declined 3 basis points to 4.18%, reflecting a modest easing in market expectations for future Federal Reserve tightening.

 

Key Treasury Yield Movements:

• 2-year yield: 4.18% (-0.03%)
• 5-year yield: 4.28% (-0.02%)
• 10-year yield: 4.55% (-0.01%)

 

As shown in the table below, Treasury forward rates shifted modestly lower across the 3-year, 5-year, and 7-year curves between July 10 and July 17, indicating a slight easing in market expectations for future rates. The decline was broad-based but measured, with the 3-year forward curve down about 2.5 to 3.1 bps, the 5-year down about 2.4 to 2.8 bps, and the 7-year down about 1.9 to 2.3 bps. The larger move in the 3-year sector suggests the market slightly reduced expectations for near- to intermediate-term policy rates, likely reflecting a more balanced outlook on inflation and economic growth.

 

Despite the weekly decline, the forward curve still slopes upward across future dates, with rates gradually increasing from spot through October 2026. This means the market is not pricing in a sharp decline in rates, but rather a modestly lower path from the prior week while still expecting rates to remain elevated. Overall, the data points to a cautious but slightly more constructive rate outlook: inflation and Fed policy concerns remain in place, but the market appears to have taken some pressure off the rate curve compared with the previous week.

 

Forward Date	3-Year 7/10/26	3-Year 7/17/26	Change (bps)	5-Year 7/10/26	5-Year 7/17/26	Change (bps)	7-Year 7/10/26	7-Year 7/17/26	Change (bps)
Spot	4.241%	4.216%	-2.5	4.307%	4.283%	-2.4	4.426%	4.407%	-1.9
07/31/2026	4.255%	4.224%	-3.1	4.319%	4.291%	-2.8	4.437%	4.414%	-2.3
08/31/2026	4.274%	4.243%	-3.1	4.336%	4.308%	-2.8	4.451%	4.429%	-2.2
09/30/2026	4.289%	4.258%	-3.1	4.351%	4.323%	-2.8	4.464%	4.442%	-2.2
10/31/2026	4.299%	4.269%	-3.0	4.363%	4.336%	-2.7	4.475%	4.454%	-2.1

 

Rate Cut Expectations

As of July 10, the market assigned a 76% probability that the Federal Reserve would leave rates unchanged at the July 28–29 FOMC meeting but was pricing in a 25-basis-point rate hike as early as September, followed by another hike around March 2027. The probability of a second increase exceeded 80%, reflecting concerns that inflation could remain elevated and require additional policy tightening.

 

By July 17, market expectations had become notably less hawkish. Investors pushed the timing of the first 25-basis-point rate hike from September to October and no longer assigned a meaningful probability to additional hikes thereafter. While the probability of a second hike remained around 60% between March and July 2027, this is generally viewed as a near 50/50 outcome rather than a strong conviction. The moderation in rate-hike expectations was primarily driven by softer-than-expected CPI and PPI data, which suggested inflation pressures may be easing and reduced the perceived need for further Fed tightening.

 

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NEXT WEEK’S ECONOMIC CALENDAR:

Key scheduled releases include:

• 7/20 (Monday)
  • Leading Index for June
• 7/21 (Tuesday)
  • ADP Weekly Employment Change for July 4
• 7/22 (Wednesday)
  • MBA Mortgage Applications for July 17
• 7/23 (Thursday)
  • Weekly Initial Jobless Claims & Continuing Claims
• 7/24 (Friday)
  • S&P Global US Manufacturing PMI for July
  • S&P Global US Services PMI for July
  • S&P Global US Composite PMI for July
  • New Home Sales for June

For a visual representation of this week’s economic review, you can view or download the slide deck here:07.24.2026 CBC Weekly Economic Update

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Mark Yoon, CFA CPA
EVP & CFO of Commercial Bank of California

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