Were the falling US yields post-CPI really a head-scratcher?

After yesterday’s hotter-than-expected CPI print, dollar bulls were likely left scratching their heads as U.S. Treasury yields took an unexpected dip. After a steady climb in recent days, the sudden retreat in yields perhaps cashing in ahead of the weekend after Fed officials mostly shrugged off the inflation bump, with the 2-year yield slipping 6.4 basis points and the 10-year barely moving, down just 1.2 bps to 4.061%. Hence, it is a good reason why USDJPY came off.

Over in the EUR/USD camp, the pair flirted with the downside near 1.0900 but clawed back to 1.0933, helped along by whispers of China’s potential fiscal fireworks—and hope that those might have a positive spillover effect on Europe. The Aussie dollar also caught a bit of wind from the same optimism surrounding China.

On the inflation front, the silver lining is that shelter inflation is finally cooling, thanks to softer rental prices that the market’s been seeing for a while now. But not all is rosy—car insurance, healthcare, and other services remain sticky, and disinflation in core goods seems to be bottoming out. Weekly jobless claims rose significantly to 258K, up from 225K, driven in part by Hurricane Helene but also potentially reflecting layoffs in Michigan’s auto sector.

Fed speakers, including Austan Goolsbee, John Williams, and Thomas Barkin, essentially brushed off the hot CPI print, signalling that the central bank is still on track to keep easing—though maybe not at the same breakneck pace. With the Fed laser-focused on keeping labour market gains intact, the path of least resistance still points to rate cuts.

Politically, the odds of a Trump "Red Sweep" have been inching up, potentially explaining some recent moves in U.S. rates and the dollar—maybe even giving the yen a bit of a boost on the so-called "Trump Jump."( He thinks the US has a currency problem, and the Yen is the arrow's tip.) But let's be real: Trading yen these days feels like running on a hamster wheel, round and round without much to show for it.

In Asia, FX markets stayed on the back foot under pressure from a stronger dollar as USD/CNH crept above 7.08. All eyes are now on China’s Finance Minister Lan Fo’an, who’s set to speak on Saturday about “intensifying countercyclical fiscal policy to promote high-quality economic development.” The market is hoping for some real fiscal stimulus details. Still, any changes to the fiscal deficit target will likely need approval from the National People’s Standing Committee (NPSC), which isn’t meeting until the end of the month.

Hence, we believe the Ministry of Finance will likely kick the can down to October, allowing recent rate cuts and mortgage policy tweaks some time to work their way through the economy—particularly the housing sector—before even thinking about unleashing the fiscal bazooka. The real question is whether investors will interpret this delay as a sign that Xi wants the PBoC to do all the heavy lifting. If that sentiment gains traction, there’s a risk markets could grow impatient, especially if fiscal stimulus continues to sit on the sidelines while the central bank shoulders the burden.

The next 48 hours could be crucial, especially with China's stimulus rumours swirling and traders eagerly waiting for a clear signal to take the next step.