Market Sentiment Shifts as Fed's Rate Policy Faces Disinflationary Pressure

On Wednesday, markets saw growing speculation that the Federal Reserve won't be able to sustain high interest rates for an extended period. This is due to the recent surge in Treasury bond yields, especially the long-term ones, which inherently exerts a strong disinflationary effect. The Central Bank (CB) itself acknowledged this, and in a previous article, we delved into remarks from the head of the Federal Reserve Bank of Dallas, Mrs. Logan, concerning the recent significant rise in long-term yields compared to their short-term counterparts, further emphasizing the 'tightening effect' of the restrictive monetary policy. After these insights were shared with the market, long-term yields declined, while short-term yields remained relatively steady. Today, at the start of the European trading session, we witnessed yet another drop in long-term yields. Meanwhile, the hawkish Producer Price Index (PPI) report did little to dampen expectations of an interest rate hike in November. Consequently, the gap between long-term and short-term bonds narrowed:Bond yields are a key gauge for risk-free interest rates, serving as a reference point for all other interest rates in the economy.Mortgage debt constitutes a substantial 70% of American consumers' total debt. This fact may clarify why shifts in long-term rates have a more pronounced impact on the economy, and by extension, on inflation:The PPI report unveiled rather surprising data. The Producer Price Index increased by 0.5% month-on-month, surpassing the forecast of 0.3%. This significant deviation from expectations was anticipated to influence expectations about the Fed interest rate path.For the third consecutive month, we're seeing sustained high levels in the monthly changes of producer prices:The robust PPI figures lay the groundwork for bullish expectations concerning tomorrow's inflation report. Nevertheless, observing the dollar's reaction to the report—featuring a sharp surge followed by a quick fading of the bullish momentum leading to a downturn—it's safe to assert that the current market concern centers more on the notion that the Fed may abandon its high-interest rate maintenance plans than on another hawkish Consumer Price Index (CPI). Consequently, the possibility of breaking above the upper boundary of the descending trend for EUR/USD (around the 1.0640/50 range), with a rally extending towards 1.07, is gaining traction: