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(Bloomberg) -- A weaker-than-expected U.S. inflation report suggests the dollar won’t be making a comeback anytime soon as Treasuries continue to rally amid rising geopolitical tension, analysts say; the market’s expectations for a rate hike by year-end also took a hit.

• CPI y/y (July) 1.7% vs est. 1.8%, prior 1.6%
• CPI excluding food and energy y/y 1.7%, matching est., prior 1.6%
• CPI m/m (July) rose by 0.1% vs est. 0.2%, prior 0.0%
• January 2018 fed fund futures show ~34% odds of a rate hike by year-end after July CPI missed estimates; contract showed roughly 40% probability before the release
• Deutsche Bank (Alan Ruskin, interview)
  • UST rally after soft CPI data could spell trouble for dollar
  • If 10Y UST yield starts moving below 2.20% levels, the decline risks undermining the dollar, especially USD/JPY
  • “Each month you have some excuse for why the data is soft, but the overall impression is still that inflation pressures are remarkably contained for this point in the cycle”
  • Still “pretty good chance” Fed will hike rates in December; however, it will become more difficult if soft data trend continues; MORE
• TD Bank (Mazen Issa, interview)
  • Market “might not want to be holding risk into the weekend” given geopolitical tensions with North Korea
  • Recommends staying short USD/JPY, cautious in chasing additional topside for EUR/USD
  • “Overall, there’s something in here for everybody” in CPI report; core inflation stable, consistent with Fed’s expectation of temporary softness
  • USD dip after disappointing CPI data likely “temporary” as inflation data is “not really a game changer for the Fed”
• BMO Capital Markets (Ian Lyngen, in an email)
  • Small inflation miss driven by auto prices was enough to cut the market’s odds of a December Fed rate hike
  • “We’ve seen the recent price action justified and the questions about the persistent weakness in inflation remain”
  • Next target for 10Y yields is 2.15%-2.155% area
• BNP Paribas (Adnan Akant, interview)
  • Data “on the disappointing side”; markets didn’t react dramatically because of North Korea uncertainty, NY Fed President Dudley’s comments on Thursday that it will take “some time” for inflation to reach 2% target
  • “North Korea generally supports the dollar as the fear factor continues”
  • Inflation “not just a U.S. problem”; “it’s a worldwide problem”
  • December rate hike now “a little bit suspect”; probably does not affect balance-sheet unwind in September
• Janney Montgomery Scott (Guy Lebas, interview)
  • CPI data “puts the nail in the coffin” for 2017 Fed hikes; “this, at least, pushed off until December” Fed’s start of balance-sheet reinvestment policy change
  • Argument that there are transitory forces affecting inflation is growing “thinner the more this persists”
  • Firm predicts 10Y UST yield ends 2017 in 2.1%-2.4% range
• Jefferies, (Ward McCarthy, interview)
  • July CPI stability likely sets stage for “end of deceleration”
  • Fed looking for m/m increases of 0.2%, which “there is a good chance will be in the cards as long as gas prices continue to churn higher as they have”
  • Jefferies leaves unchanged prediction that Fed announces in September an October start to slowing balance- sheet reinvestments and likely lifts rates in December
• FTN Financial (Christopher Low, in an email)
  • Inflation most likely experiencing transitory weakness with wage growth because corporate profits haven’t recovered from commodities recession in 2015; it will pass as long as economy continues to recover
  • “The FOMC would be wise to follow the advice of its young maverick Kashkari: Be patient and acknowledge what is in the data. It is the path to ultimate credibility”
• MUFG (Chris Rupkey, in an email)
  • Four straight months of 0.1% monthly core inflation changes make it hard to get to Fed’s 2% goal
  • Cooling of inflation this late in economic cycle raises questions about how strong growth really is
  • “The bond market is running with the idea that the Fed’s plans for a third rate hike later on this year are not at all locked and loaded”

--With assistance from Brian Chappatta and Liz Capo McCormick. To contact the reporter on this story: Anna Windemuth in New York at awindemuth1@bloomberg.net To contact the editors responsible for this story: Boris Korby at bkorby1@bloomberg.net Vivien Lou Chen