The latest set of inflation prints (CPI at 0.2% MoM sa, core CPI at 0.3%) is unlikely to change Fed pricing. To be sure the beat in core CPI (driven largely by shelter), has put a dampener on the persistent rally in US Treasuries. However, the broader picture is still one of cooling price pressures (3-month annualized of 0.9% for headline and 1.9% for core CPI) that would allow the Fed to recalibrate rates lower. Accordingly, the spike up in frontend yields is more a function of the rates space becoming overly dovish heading into the print and hence needing to pare its enthusiasm for rate cuts. There are a couple of considerations at this point in the cycle with rates this low. First, the default for the Fed next week should be a 25bps cut. This is in line with our house view. With no labour market data till next month, the only way to nudge the Fed towards more aggressive action would be a material weakening in financial conditions. Markets have also reduced the odds of a 50bps cut to about 18%, down from close to 30% the day before. Second, even after the back up in front end yields, the market is still factoring more than 250bps of cuts by end-2025. We are not convinced that the Fed would need to cut by that much. Cooling inflation is probably insufficient for the Fed to deliver that much easing. Instead, the dovish rates pricing would probably require a string of weak labour market data to materialise, the extent of which is still unclear. In considering USD rates direction, we continue to put more weight on labour market data and financial conditions while noting that commodity prices appear to be signalling some growth worries ahead. 
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