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[Unexpectedly Cooling Inflation Data Causes Wall Street to Quickly Shift Stance: July Rate Hike Bets Plunge] 1. The latest data from the U.S. Department of Labor shows that the Consumer Price Index (CPI) fell 0.4% month-on-month in June, the largest monthly drop since April 2020 and the first negative month-on-month growth in six years. The year-on-year increase fell to 3.5% from 4.2% in May. The core CPI, excluding food and energy, was flat month-on-month and rose 2.6% year-on-year, both lower than market expectations. The sharp drop in energy prices was the main driver of the overall decline in inflation. 2. The unexpectedly cooling inflation quickly reversed market pricing in the Federal Reserve's policy path. Previously, influenced by hawkish statements from Fed officials and the US-Iran conflict pushing up oil prices, market bets on a rate hike at the July 29 meeting had risen to about 46%. After the data release, the probability of a July rate hike shown in the interest rate swap market plummeted to about 20%. Futures traders have postponed their expected timing for the rate hike to September or even October. 3. The bond market reacted sharply. The yield on the two-year US Treasury note, highly sensitive to monetary policy, plunged as much as 14 basis points to 4.14%, marking its biggest single-day drop since February. US stocks rallied in response, and the dollar weakened against all other major currencies. Zach Griffiths, Head of Investment Grade and Macro Strategy at CreditSights, noted that the June CPI data essentially ruled out a July rate hike. Despite persistently high inflation and a deteriorating situation in the Middle East, the report gave the Federal Reserve more time to observe the situation. Following the data release, Federal Reserve Chairman Warsh reiterated a "zero-tolerance" policy towards persistently high inflation but also affirmed the resilience of the economy.