The "Global Asset Pricing Anchor" Faces a Critical Moment! If the US CPI Brings a Dovish Surprise, US Treasury Shorts Covering Could Boost Risk Asset Rallies

Wall Street strategists are now almost as divided as possible on whether the Federal Reserve will hike rates again next month. However, one point remains uncontested: Wednesday’s release of the US CPI inflation report will largely determine the Fed’s next move.

According to information obtained by the Zhihui Finance APP, swap market data shows that traders are currently pricing in about a 50% probability for a 25 basis points hike. After July’s surprise decline in non-farm payrolls, the probability of a 25bp rate increase in September is now at an extreme 50-50 split, while the Fed under Kevin Warsh has significantly reduced forward guidance, forcing the market to again rely on hard data to determine policy direction.

Therefore, the influence of July’s CPI data is clearly asymmetric—the appearance of moderate inflation would further weaken the case for another hike, but a stronger-than-expected hot print could rapidly make a September rate hike the new baseline scenario. For the US 10-year Treasury yield—often called the "anchor of global asset pricing"—the current risk-reward in the bond market is already heavily tilted towards “rapid yield declines driven by soft July CPI,” mainly because of the positive resonance between macro data and CTA bond positioning structures.

At this stage, the bond market is showing signs of dangerous convexity, or so-called position amplifiers: Data compiled by UBS indicates that CTA underweights in bonds had tripled by the end of July compared with two weeks before, and each 1bp move in the 10-year Treasury yield impacts CTA portfolios by around $300 million—the largest since such data became available in 1990. Thus, if core CPI hovers around the 0.15%–0.20% range, not only will the market lower the probability of a September rate hike, but it could trigger a mechanical feedback loop of “yield decline—CTA forced covering—further yield decline.” Sustained drops in 10-year yields—an “anchor” for global assets—would act as a major catalyst for global equities and other risk assets now in rebound.

Inflation data takes over as market driver; CPI becomes the pivotal factor for September rate hike decisions

Molly Brooks, US market rates strategist at TD Securities, said if inflation data is significantly above consensus, the probability of a Fed rate hike could rise sharply; but another moderate reading would give policymakers more room to wait and see.

Brooks said: “We think this data is critical for September.” She added that market reaction would likely be asymmetric—if the data beats expectations, it will push rate hike odds much more than a below-expectation reading would lower them.

Economists' consensus forecasts expect core CPI to rise slightly month-on-month by 0.2%, following a surprise decline of 0.4% previous reading. Bloomberg Economics projects that core CPI’s year-on-year growth will slow to 2.4% in July, possibly hitting the lowest level since March 2021.

On Wednesday, ahead of the US market open, Treasuries saw little price movement as markets waited for the inflation report. The benchmark 10-year US Treasury yield fell 1 basis point to 4.68%, and the 30-year Treasury yield dropped to 5.23%.

As shown above, swap market traders are aggressively repricing the Fed’s next move. Some US Treasury traders argue that markets have already priced in more hawkishness than underlying economic conditions support, and are betting that the new data will force a reassessment.

TCW Group fixed income portfolio manager Ruben Hovhannisyan said, “We expect that as the extremely hawkish pricing at the short end of the yield curve unwinds, the market will see a bullish steepening.” He added: “Our overweight is mostly concentrated at the front end of the curve.”

However, recent data also show how quickly the economic landscape can shift. Last month's CPI report showed the first drop in inflation since 2020, leading to a 14bps drop in 2-year Treasury yields at one point. Last week’s jobs report revealed US employers unexpectedly cut jobs in July, prompting traders to further lower expectations for Fed hikes this year.

Goldman Sachs rate strategists said in a report last Friday that the slowdown in job growth “may have raised the bar for core CPI” in order for a September hike to become “clearly the market’s likely outcome.”

In recent weeks, several Fed policymakers, including Dallas Fed President Lorie Logan and Minneapolis Fed President Neel Kashkari, have publicly warned that acting too late on inflation could risk needing even more aggressive action later on.

Kelsey Berro, portfolio manager in JP Morgan Asset Management’s fixed income division, said: “Right now, the real story is inflation, not the labor market.” She adds: “It’s a very unusual situation—the economy is still expanding, but the pace of core PCE is clearly higher than every other indicator.”

Berro said front-end Treasury pricing is currently appropriate for potential hikes, and that if CPI data significantly exceeds consensus, it will further raise the risk of a September hike and ignite fresh short-term rate bets from markets.

With Chairman Kevin Warsh seeking to reduce the Fed’s forward guidance on future policy intentions—which in recent years had become standard practice before formal decisions—economic data is regaining importance. After the Fed kept rates unchanged last month, long-term Treasury yields soared to their highest in nearly 20 years.

Macro Hive founder and market strategist Bilal Hafeez said: “The market is telling the Fed it faces an inflation issue, but the Fed’s view is that recent data is weak enough that hikes aren’t needed yet.”

“Given the current extreme negative positioning and the significant yield rise this quarter, even if the long-term bearish case for US Treasuries remains, the risk/reward favors a tactical bounce in long-term bonds,” said Bloomberg Strategists’ cross-asset strategist Ven Ram.

George Catrambone, US fixed income head at DWS Americas, said he expects the CPI report to give markets clearer guidance on the Fed’s policy outlook than the later Jackson Hole Global Central Banking Symposium this month.

Catrambone said: “It's a high bar for overall CPI to turn negative again, but after weak nonfarm payrolls, as long as core CPI comes in below 0.2% month-over-month, that should be enough for the Fed to stay on hold.” He added: “Markets may find Warsh hard to interpret, but data will be far more convincing than any dovish or hawkish rhetoric from Jackson Hole.”

DWS prefers holding 2- to 5-year US Treasuries, expecting the Fed won’t hike again this year. Catrambone elaborated: “The yield curve between Fed funds and the 2- to 5-year sector is quite steep, so that segment looks very attractive for investors.”

Record CTA short positions meet cooling inflation; Bonds may fuel a new round of risk asset rallies globally

The 10-year yield, around 4.68% pre-CPI release, already reflects a significant “higher for longer + potential for renewed hikes + fiscal term premium + oil price risk” narrative; Goldman Sachs says the extremely weak June CPI had some randomness, but with softer tariff passthrough, fading war shocks, and diminishing AI-related price effects, future monthly inflation should gradually soften, with oil remaining the main upside risk.

UBS data shows that CTA underweights in bonds had tripled by the end of July compared to two weeks before, and each 1bp move in the 10-year Treasury yield now impacts CTA and fast-money portfolios by about $300 million—the most since 1990. If core CPI hovers between 0.15% and 0.20%, the market will not only lower odds of a September hike but may also trigger the feedback loop of “yield decline—CTA stop-out/cover shorts—further yield decline.” Sustained 10-year yield drops—an “anchor of global asset pricing”—would be a strong bullish catalyst for rebounding global equities.

Falling Treasury yields matter especially for global equities in comeback mode, since the forthcoming CPI reading will decide not only markets’ view of Fed policy, but whether the risk-free discount rate in global equity valuation models will keep rising or pivot.

US equities just staged a sharp rebound: S&P 500 rose 3.58% and Nasdaq 5.19% in the week ending Aug 7, with the S&P hitting new record highs; 85.1% of 436 S&P 500 firms reporting earnings beat estimates, indicating the rally is not just about valuation expansion, but is underpinned by strong profits.

Therefore, if tonight’s print shows “core CPI much below 0.2% + jobs already soft but earnings still solid,” it amounts to the market’s favorite Goldilocks scenario: 10-year Treasury yield drops—equity risk premium falls—present value of long-term cash flows increases—long-duration AI tech, software, small-cap growth, REITs, and Asian emerging markets see continued valuation recovery, while a weaker dollar rate advantage further eases global financial conditions.

If core CPI falls below roughly 0.2%, global equity markets could see a rare “fundamentals + policy outlook + technicals” triple tailwind; but if it jumps clearly above 0.25%, then the US 10-year—the “anchor” for global assets—would tighten financial conditions again, delivering a real valuation stress test for risk assets that just rebounded to record highs.

Theoretically, the 10-year Treasury yield functions as the risk-free rate (r) in key DCF valuation models for equities. If other variables (especially cash flow forecasts) don’t change—say during earnings season when there is a catalyst vacuum—higher or sustained denominator (discount rate) levels threaten to collapse the stretched valuations of AI-linked tech stocks, high-yield corporate bonds, and cryptocurrencies.

JP Morgan’s latest scenario analysis shows that if core CPI clocks in at 0.15%–0.20%, the S&P 500 is expected to rise 0.5%–1%; even at the 0.20%–0.25% baseline, a 0.25%–0.75% gain is likely. However, JP Morgan forecasts that a 0.25%–0.30% core CPI print could see the S&P 500 drop 0.5%–1.25%. That’s why the CPI’s biggest market impact may not be the inflation number itself, but a combination of “cooling inflation + hawkish pricing unwound + record bond shorts being covered” driving a rapid loosening in global financial conditions.