Nothing will determine the direction of the US bond market more than monthly inflation data this year. This week was no exception.

The April Consumer Price Index (CPI) released on Wednesday will provide the biggest test so far for the market rebound that began this month, when Federal Reserve (Federal Reserve) Chairman Jerm Powell dispelled concerns that the central bank might raise interest rates again. The index rose after the US Labor Department (Labor Department) reported a slowdown in employment growth, and yields fell sharply from last month's peak.

This incident raised the risk of upcoming inflation data — which could prolong inflation data or cause another unfortunate turn in inflation. Bank of America Corp. (Bank of America Corp.) strategists said that until then, the market will be in “waiting mode.”

CPI reports before this year fueled the sell-off in the bond market, as higher-than-expected data raised concerns that the Fed's earnings against inflation have stagnated.

The last time was on April 10, when 10-year US Treasury yields surged 18 basis points, the biggest one-day fluctuation caused by CPI data since 2002. All in all, half of this year's jump of over 60 basis points in the benchmark interest rate occurred on the day the CPI was released.

Jonathan Cohn (Jonathan Cohn), head of strategy in the US interest rate department at Nomura Securities International (Nomura Securities International), said: “The reality of the current market is that we are faltering in the data release process. The economy here does seem to have experienced some kind of weakness - but in reality, to maintain this rebound, we need to confirm from CPI data that things are not accelerating again, and we are seeing anti-inflation.”

Up until this month, these figures have largely highlighted the strength of the US economy, prompting traders to abandon general bets that the Federal Reserve will cut interest rates several times this year. This realignment has caused investors new losses and weakened their confidence in where the market is headed.

Futures positions suggest that as US Treasury yields peaked last month, many investors made up for their short bets on US Treasury bonds. US interest rate strategist Ira Jersey said in a report that overall, this position has been fluctuating as investors deal with market uncertainty.

Cohen said, “It's a bit like people used to take risks and then get burned, and now the adventurers are a bit at a loss.”

However, bond prices rose steadily this month as new signals suggest that the economy and labor market are cooling down, which will allow the Federal Reserve to begin easing monetary policy later this year.

The 10-year US Treasury yield declined by nearly 20 basis points on all but two trading days in May, to around 4.5%. More broadly, as of May 9, US Treasury bonds had risen by about 1.3%, recovering part of the 2.3% decline in April. Relevant indices show that this was the worst in more than a year.

The CPI is expected to show a slowdown in inflation. The survey's forecasters said the core interest rate — seen as the best measure of potential pressure because it doesn't include fluctuating food and energy costs — is expected to rise 0.3% in April from a month earlier, down from 0.4% in March. The overall index rose 3.4% from the same period last year, compared to a 3.5% increase in March.

This is still well above the Federal Reserve's target of 2%. Several US central bank officials recently emphasized that policy interest rates may need to stay high for a longer period of time. Governor Michelle Bowman (Michelle Bowman) said that the recent pace of inflation indicates that cutting interest rates in 2024 may not be appropriate.

However, given the market's recent rebound, traders may see any signs of progress against inflation as a signal to buy. Matthew Luzzetti (Matthew Luzzetti), chief US economist at Deutsche Bank AG (Deutsche Bank AG), predicts that the Federal Reserve will not cut interest rates for the first time until December. But he said, “Given this trend, investor sentiment is definitely more dovish.”