The seasonally adjusted CPI ticked up 0.3% (0.323%) in June, contributing to a 2.4% year-over-year change. Meanwhile, total inflation rose 1.1% (1.056%) in the month and 5.0% on the year. The consensus was looking for a 0.2% gain in the core reading and a 0.7% rise in total inflation.

Following the 8:30 a.m. EDT CPI release, fixed income futures were decreasing. The two-year future were as high as 115-24 at 8:00 a.m EDT before decreasing to 115-07.5 at 9:00 a.m. U.S. two-year yields are subsequently up 7.3 bps to 2.44%, with five-year yields up 11.9 bps to 3.21%, 10-year yields up 12.7 bps to 3.95% and 30-year yields up 13.0 bps to 4.59%.

The Eurodollar September 08 contract is down one tick to 97.14 following the release of the minutes of the Federal Open Market Committee's June 24-25 meeting. They showed that FOMC board members agreed upside risks to inflation had increased and generally agreed downside risks to growth had diminished. Most members thought the current 2.00% target rate was appropriate but that risks to inflation may initiate a reassessment

TD Securities senior economics strategist Charmaine Buskas, interpreting the minutes, said a change to U.S. interest rates was unlikely.

"These minutes are useful only insofar as they reveal the schism within the committee prior to the recent ructions in the credit market," she wrote in an email to clients. "With credit conditions once again taking a turn for the worse, there is scope that the Fed will now push back the firming in policy that they mulled at the June 24-25 meeting."

"We expect that a rate hike is off the table for 2008 and will not be seriously considered until well into 2009. There are simply too many wrinkles to iron out before the economy becomes strong enough to withstand higher rates," she added.

The yield curve is steeper, with the 10/2-year spread up 5.7 bps to 150.66 bps.

"The steeper curve? Makes sense from a Fed book-ended by inflation and economics; they can't hike and so rates at 2% are here to stay, but it does threaten long duration issues. And last we look towards the gain in Industrial Production as a hopeful sign, it's been negative for 4 months running ex oil and utilities has a positive impact due to warmer weather," wrote RBS Greenwich Capital's David Ader.

Yields on two-year Canadian government bonds are flat at 3.08%, with five-year yields up 3.3 bps to 3.32%, 10-year yields are up 6.7 bps to 3.75% and 30-year yields up 6.8 bps to 4.13%. The Canadian 10-year note is yielding 19.6 bps less than the U.S. 10-year note.

In Germany, returns on two-year German bonds are up 2.4 bps to 4.33%, with five-year yields up 3.4 bps to 4.38%, 10-year yields up 0.7 bps to 4.39% and 30-year yields down 1.6 bps to 4.74%.

Yields on UK two-year bonds are up 5.6 bps to 4.92%, with five-year yields up 3.1 bps to 4.85%, 10-year yields up 1.1 bps to 4.87% and 30-year yields up 2.1 bps to 4.59%.

As bond markets were decreasing, equities were rallying significantly. The Dow Jones industrial average closed up 277 points to 11239, the S&P 500 closed up 30 points to 1245 and the Nasdaq was up 69 points to 2285. The gains were sparked by a surprise increase in crude oil stockpiles in the U.S., as reported by the Energy Information Administration at 10:35 a.m.

Crude oil inventories surprised to the upside in the week ending July 11, advancing by 2.952 million barrels compared to the previous week's 5.840 million barrel decline. Economists had been expecting a draw of 2.2 million barrels.

WTI crude oil is down $4.25 per barrel to $134.49, sustaining a $5.67 drop on the EIA release to session lows of $132.10. The front month gold contract at the Chicago Board of Trade is down $18.20 to $960.00 per ounce.

Despite the losses in commodity prices, Toronto's S&P/TSX composite index closed up 154 points to 13512. European stock markets closed in mixed territory with the Eurostoxx up five points to 2716, the UK FTSE 100 down 21 points to 5151 and the German DAX up 74 points to 6155.

The Canadian dollar is down 0.0003 to 0.9980 against the U.S. dollar (1.0020 USD/CAD) and up 0.4150 to 104.9550 against the yen. The U.S. dollar is up 0.4490 to 105.1690 against the yen and the Dollar Index is up 0.196 to 72.068.

The euro is down 0.0094 to 1.5818 against the U.S. dollar, down 0.0088 to 1.5850 against the Canadian dollar, down 0.0020 to 0.7914 against the pound sterling and is lower by 0.27 to 166.36 against the yen.

The pound sterling is down 0.0070 to 1.9989 against the U.S. dollar and down 0.0059 to 2.0029 against the Canadian dollar.

All data taken at 4:07 p.m. EDT.

By Ryan Szporer, with contributions from Patrick McGee, This email address is being protected from spam bots, you need Javascript enabled to view it and Erik Kevin Franco, This email address is being protected from spam bots, you need Javascript enabled to view it , edited by Nancy Girgis, This email address is being protected from spam bots, you need Javascript enabled to view it

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