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It’s a mixed up week with non-farm payrolls already passed but CPI scheduled for today. It’s a big one as it could re-frame the debate about how many rate cuts are possible. Notably, despite the strong non-farm payrolls on Wednesday, the market isn’t convinced the Fed will hold. Year-end pricing for rate cuts is up to 59 bps from 48 bps last week.I think the shift in pricing is more-reflective of what’s been happening in stock markets as AI disruption is priced in, particularly in software stocks. The market might be looking at layoffs, economic disruption and multiple contraction. The Fed has been responsive to equity declines in the past, for better or worse.On CPI, the headline is expected to rise +0.3% m/m and 2.5% y/y. Core is also seen at +0.3% and +2.5%.We have some great previews on the report:What is the distribution of forecasts for the US CPI?This one notes that there is somewhat of a skew towards a higher y/y reading in core and headline.US January CPI report to offer a cleaner read on inflation developments?From Justin:As always, the focus will stay on core prices when taking in the report
as a whole. And if the annual estimate continues to keep in the middle
range between 2% to 3%, it will be tough to see the Fed taking on a much
more dovish stance than what they are sticking with currently.In another note:JPMorgan’s US Market Intelligence desk said weaker retail sales and high-frequency indicators have increased the importance of the CPI release, adding that a hawkish CPI print is more likely than a dovish outcome, but does not expect a strong market reaction to a stagflationary reading.Here is the chart:
This article was written by Adam Button at investinglive.com.
💡 DMK Insight
CPI data today could shift market sentiment significantly regarding Fed rate cuts. Despite strong non-farm payrolls, traders are skeptical about the Fed’s next moves. If CPI comes in higher than expected, it could reinforce the idea that rate cuts might be further off than some anticipate, leading to volatility across equities and forex markets. Watch for how the dollar reacts; a stronger CPI could push the dollar higher, impacting pairs like EUR/USD and GBP/USD. Conversely, a lower CPI might fuel speculation for earlier rate cuts, potentially boosting risk assets. Keep an eye on the 1.10 level for EUR/USD and 1.25 for GBP/USD as key resistance points. The market’s reaction to this data could set the tone for the rest of the month, so be prepared for sharp moves based on the outcome.
📮 Takeaway
Watch today’s CPI release closely; a higher reading could delay rate cuts and strengthen the dollar, impacting major currency pairs.
