Bond traders bet: This week’s US CPI will surge, increasing pressure on the Federal Reserve to raise interest rates.

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The bond market is preparing for an inflation shock. Traders are betting that the U.S. consumer price data to be released this week will show the biggest increase in years, further reinforcing expectations that the Federal Reserve will shift toward raising interest rates.

Unexpectedly strong U.S. jobs data on Friday already caused U.S. Treasury yields to jump sharply, with the 10-year yield soaring to 4.55%, a two-week high; the 2-year yield, which is particularly sensitive to Fed policy expectations, hit 4.18%, the highest level since February 2025. The market's bets on a Fed rate hike before December have heated up accordingly.

This Wednesday's upcoming Consumer Price Index (CPI) data has become the next key catalyst. According to Bloomberg, swap contracts linked to the report show that traders expect CPI year-on-year growth of about 4.3%—if this happens, it would be the biggest single increase since 2023.

If this figure materializes, together with Thursday's producer price data, it could further cement expectations that the Fed will abandon its dovish stance, and set the tone for the June 17th policy meeting chaired for the first time by incoming chairman Kevin Warsh.

Jobs Data Breaks Rate Cut Narrative, Rate Hike Expectations Rekindled

Strong jobs market data has become the direct trigger for this latest round of market repricing. In recent months, U.S. economic activity and labor market data have exceeded expectations: in May, the U.S. saw a 172,000 increase in non-farm payrolls, nearly double the market's forecast of 88,000, and much higher than April's 115,000.

Luigi Buttiglione, CEO of consulting firm LB Macro, said, "The narrative that the Fed will be forced to cut rates has disappeared, ended by the data." He expects the Fed to raise rates by a total of 50 basis points this year, possibly starting as early as September.

Christophe Boucher, Chief Investment Officer at ABN AMRO Investment Solutions, was even more direct: "If Warsh wants to cut rates early in his term, that's now impossible. The labor market is currently too robust to provide a basis for rate cuts."

Major Wall Street banks have pulled back their previous forecasts for rate cuts in 2026. Economists at BNP Paribas adjusted their forecast on Friday to the Fed potentially raising rates up to three times, most likely starting in December.

Iran War Stalemate Pushes Up Energy Prices, Inflation Pressure Continues

This round of rising inflation expectations is not an isolated event, but rather has deeper macroeconomic roots. Since late February, the global bond market has undergone a profound shift—when the U.S. and Israel attacked Iran, oil prices surged, and prior bets on Fed rate cuts in 2026 collapsed.

Currently, a lasting ceasefire in Iran remains far off, energy prices face further upside risk, and inflation dangers cannot dissipate. At the same time, the resilient U.S. economy itself presents headwinds for the bond market and makes Warsh's situation even more complicated—he may also face political pressure from the White House to lower borrowing costs.

The market is now focused on two key data points this week: Wednesday's CPI report and Thursday's Producer Price Index (PPI). If either data point shows accelerating inflation, it may further strengthen market expectations and prompt Fed officials to remove so-called "dovish tilt" language from their policy statements.

Swap market pricing has already reflected traders' heightened alert for inflation overshooting expectations. If CPI annual growth is confirmed at around 4.3%, it will provide ample grounds for the Fed to deliver a tougher signal at the June 17th meeting and may push Treasury yields even higher.

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