US CPI Fuels Fed Wagers, US Inflation Comes In Cooler Than Expected

Economic Overview - The U.S. economy is showing signs of strength with stronger-than-expected job growth and encouraging inflation data, leading to a positive outlook [1][3][6] - Despite the positive aggregate economic indicators, underlying consumer conditions remain a concern, suggesting that the reported job growth may be overstated by approximately 60,000 jobs per month [2][5] Interest Rates and Monetary Policy - The two-year yield has decreased to its lowest level since September 2022, influenced by job growth and cooler inflation [3][4] - There is a belief that monetary policy is tighter than necessary, with calls for lower interest rates to support economic growth [5][6] - Traders are pricing in a 50% chance of a third rate cut by December, although some analysts argue that this may be an overreaction to recent data [8][9] Inflation Insights - Inflation remains relatively contained, but core services are contributing to underlying inflation pressures [6][7] - The Federal Reserve is expected to focus on PCE data rather than CPI, with upcoming numbers likely to influence future rate decisions [6][8] - Concerns exist regarding the potential for inflation to persist, particularly as tariffs begin to impact consumer prices [28][30] Global Debt Market Trends - U.S. companies are increasingly engaging in reverse Yankee bond sales, raising significant amounts in non-dollar markets, with strong demand observed [40][42] - Alphabet's recent $5.5 billion sterling deal and Goldman Sachs' €7 billion sale highlight the trend of U.S. firms diversifying their funding sources [41][42] - The current yield environment shows U.S. dollar yields around 4.8%, while euro-denominated yields are approximately 3%, suggesting potential cost advantages for companies issuing in euros [44] Private Credit and Software Sector - The software sector is facing scrutiny due to fears of AI disruption, but some analysts view this as a potential buying opportunity [77][78] - Private credit firms are categorizing investments variably, raising questions about transparency and the actual exposure to software companies [79][80] - Despite concerns, many software companies are performing well, with most loans marked at par, although the evolving AI landscape poses future risks [82]