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Exchange-traded funds (ETFs) investing in long-term U.S. Treasury bonds surged to their highest levels of the year as investors gear up for another benign inflation report due Wednesday.

The U.S. Bureau of Labor Statistics is scheduled to release the Consumer Price Index (CPI) for August on Wednesday at 8:30 a.m. ET. Economists are predicting a 0.2% month-over-month increase in both headline and core inflation, the latter of which excludes food and energy prices.

The Cleveland Fed's Inflation Nowcasting model projects similar results, with headline CPI at 2.56% year-over-year and core CPI at 3.21%.

Ed Yardeni, a well-known Wall Street veteran, said, “August’s CPI should continue to show progress in moderating inflation,” adding that the expected print would mark the lowest headline inflation since February 2021.

In a similar tone, Bank of America analysts predict that headline inflation will decline by 0.3 percentage points to 2.6% year-over-year, while core inflation is expected to hold at 3.2%.

“The August CPI report should continue the string of good news on inflation,” the bank said in a recent note.

Key Data and Expectations Summary

Metric August MoM (exp.) August YoY (exp.) July YoY Headline CPI +0.2% 2.6% 2.9% Core CPI (ex-food and energy) +0.2% 3.2% 3.2%

Federal Reserve Rate Cut Speculation

Market participants are currently pricing in a 71% probability of a 25-basis-point rate cut at the Federal Reserve’s September meeting, and a 29% chance of a larger 50-basis-point cut.

Recent comments from Fed Governor Christopher Waller and New York Fed President John Williams indicate that a 25bp rate cut remains the baseline expectation, but larger cuts could be on the table if economic data, particularly from the labor market, worsens.

Waller, speaking at the University of Notre Dame, noted that the Fed could act “quickly and forcefully” if needed, and signaled openness to “front-loading cuts.”

Williams emphasized that the U.S. is “moving in the right direction” on inflation but warned, “we are not there yet on achieving 2% inflation.”

Williams also highlighted that the labor market remains strong, with the unemployment rate still “relatively low by historical standards.”

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