As the headlines hit on Tuesday, the CPI report looked reasonably contained. Core inflation increased at a 2.9% annual rate in June, slightly below the 3% forecast even if a little faster than in May. Top-line inflation accelerated to a higher-than-expected 2.7% from 2.4% the previous month.
But rising prices across an array of goods, from coffee to audio equipment to home furnishings, were seen as worrying evidence that import tax hikes were indeed passing through to households - reinforcing Federal Reserve caution in cutting rates, not least with much wider tariff moves due next month.
The producer price report on Wednesday will hold that take up to the light again.
Fed futures shifted to reduce the chances of another Fed rate cut as soon as September to little more than 50%, and full-year easing bets were pared back to as low as 42 basis points.
"My base case is that we'll need to keep interest rates modestly restrictive for some time to complete the work of returning inflation sustainably to the 2% target," Dallas Fed boss Lorie Logan said on Tuesday, with debate largely hinged on whether tariff hikes would amount to one-off inflation jolts or be a persistent aggravator.
The Fed stance comes amid repeated attacks on Chair Jerome Powell from President Donald Trump, who insisted again on Tuesday that rates should be cut by at least 300 bps immediately.
Political pressure on the Fed is starting to unnerve many on Wall Street.
Speaking after the bank's results on Tuesday, JPMorgan boss Jamie Dimon said Fed independence was "absolutely critical".
"Playing around with the Fed can often have adverse consequences, absolutely opposite of what you might be hoping for," Dimon said.
Even though global investors see Treasury Secretary Scott Bessent as favorite to get the nod as new Fed Chair once Powell's term ends next year, Trump doused that by saying: "I like the job he's doing."
U.S. Treasuries reacted badly to the CPI, meanwhile, with 30-year yields recapturing the 5% handle they last topped back in May, while 10-year yields hit their highest in over a month at just shy of 4.5%. Ten-year inflation expectations of 2.4% crept to their highest since March.
The darkening Fed horizon knocked the S&P 500 back into the red - even as Nvidia's resumption of AI chip sales to China lifted both its stock and the tech-heavy Nasdaq to new records.
But, in a resumption of its link with yields that seemed periodically absent during a torrid first half of the year for the greenback, the U.S. dollar rallied with Treasury rates, most obviously to its highest level against Japan's yen since April 2's tariff shock.
While Tuesday's focus was on the tariff-related inflation hit to Treasuries, it's been a rough week for government bonds everywhere - especially in Japan as long-term yields there hit new highs this week ahead of the July 20 upper house election and related fiscal policy worries.
With Prime Minister Shigeru Ishiba's shaky minority government beholden to an array of opposition parties, the rise in support for a small new 'Japanese First' party, Sanseito, could become a factor in the election outcome.
JGB yields pulled back on Wednesday, however, and relieved some of the pressure. French and German government debt yields also retreated slightly from three-month highs after a series of French budget cuts were announced the previous day.
But Britain was faced with its own bout of renewed inflation angst as the June annual CPI rate raced well above forecasts to 3.6% - casting some questions over the timing of further Bank of England monetary easing.
Sterling was steady, but five-year gilt yields hit a one-month high and 30-year gilt yields hit their highest since May.
Back on Wall Street, the second-quarter earnings season started on a somber note on Tuesday.
JPMorgan slipped despite raising its 2025 net interest income outlook, while Wells Fargo fell even as its profit rose on reduced loan-loss reserves. BlackRock notched a new milestone for assets under management, yet its shares slid too.
Bucking the trend, Citigroup climbed after its traders delivered a windfall that boosted second-quarter profit.
Morgan Stanley and Goldman Sachs are among those reporting on Wednesday.
In Europe, ASML fell almost 7% earlier on Wednesday after the world's biggest supplier of computer chip-making equipment warned that it may not achieve growth in 2026, even after its second-quarter bookings beat market expectations.
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