The New York Fed’s June Survey of Consumer Expectations showed 1-year inflation expectations edging up to 3.7% from 3.5% in May, the highest since September 2023. Expectations over three years also rose, to 3.3% from 3.1%, while the five-year measure was unchanged at 3%. The release came as oil prices and survey readings firmed, even as prior comments from the New York Fed president pointed to a decline in headline inflation alongside energy prices and suggested policy settings were aligned with the central bank’s mandate.
Rate markets reacted cautiously. Futures-implied odds of a September Fed hike ticked up to 47.4% from 39.4% on Monday, but they remained below the 54.7% priced a week earlier. Forecasters’ view on the next inflation print was steady, with consensus still expecting a negative 0.1% month-on-month reading for the June CPI report due next week.
Disconnect Between Consumer Sentiment and Market Pricing
We see a clear disconnect between what consumers feel and what markets were pricing. The New York Fed’s June survey showed rising inflation fears, yet Fed funds futures were not fully convinced of a September rate hike. This tension created an opportunity centered on the June CPI data release.
The June 2026 CPI report has now been released, and it came in hotter than the -0.1% consensus, printing at +0.2% month-over-month. The latest Bureau of Labor Statistics data shows this was driven by sticky shelter and transportation costs, validating the consumer survey’s concerns. This surprise has forced a rapid repricing in the market.
Market Repricing and Positioning Amid Persistent Inflation
In response to the data, we have seen the probability of a September rate hike jump from 47% to over 65% on the CME FedWatch Tool. The 2-year Treasury yield, highly sensitive to Fed policy, immediately spiked by 15 basis points to 4.95%. This confirms the market was caught off guard by inflation’s persistence.
Given this, we are adjusting our positions to be more hawkish on short-term rates. We believe selling September SOFR futures or buying puts on Treasury bond ETFs like IEF offers a direct way to capitalize on this repricing. The market is now waking up to the reality that the Fed may need to act again.
We should also anticipate higher market volatility in the coming weeks. The CBOE Volatility Index (VIX) has already ticked up from 13 to over 15, and we expect this trend to continue as the market digests the new inflation reality. We are considering buying VIX call options to hedge against or profit from a broader equity market downturn.
