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U.S. CPI Inflation Data May Greenlight Gains for Stock and Bond Markets

By:Ilya Spivak

Stock and bond markets may push higher if U.S. inflation data keeps the dovish setting of Federal Reserve interest rate cut expectations undisturbed.

  • U.S. CPI data to show modest progress on lowering core inflation in December.
  • An uptick in headline price growth probably won’t dissuade dovish speculation.
  • Stock and bond markets are likely to cheer if Fed rate cut bets are undisturbed.

Wall Street bulls are back on offense after a round of bloodletting in the first week of January.

The bellwether S&P 500 stock index erased nearly 80% of last week’s losses. The rebound comes ahead of the much-anticipated release of December’s U.S. inflation data, which traders hope is going to endorse a round of meaty interest rate cuts.

The Fed makes progress on U.S. inflation

Incoming consumer price index (CPI) statistics are expected to show a headline rise of 3.2% year-on-year, marking a slight pickup from November’s 3.1%. However, the markets are likely to pay closer attention to the so-called “core” measure, which prunes away food and energy prices from the calculation.

Experts expect those numbers to paint a more encouraging picture, with the year-on-year growth rate coming down to 3.8% and recording the slowest expansion since May 2021. This is a more relevant gauge for Federal Reserve policymakers, who have little direct influence on global food and energy costs.

U.S. Consumer Price Index y/y
Source: Bloomberg

Analytics from Citigroup suggest U.S. economic data outcomes have increasingly converged on consensus forecasts since mid-August as analysts upgraded 2024 growth expectations. That seems to imply that their models are relatively well-tuned to economic reality, making sharp deviations from the baseline seem less likely.

Stocks and bonds after U.S. CPI data: Green light?

As ever, the key question for the markets will be whether the results endorse the baseline outlook for the Fed policy path as it is priced into asset valuations. That sees five 25-basis-point (bps) interest rate cuts on the menu in 2024. The first reduction is penciled in to appear no later than May. The probability of a move sooner in March is 69%.

Futures-implied FOMC outlook vs. S&P 500
Source: Bloomberg

That’s probably welcome news for stock and bond markets alike. They roared higher in November and December as investors set their sights on the start of the Fed rate cut cycle. The first week of the new year was then something of a reset, with markets pointedly backtracking on the previous two months’ price action.

From here, a minimally disruptive CPI report that leaves markets to their dovish inclinations may translate as shot in the arm for risk appetite, amounting to a green light for two weeks of smooth sailing until the arrival of fourth-quarter U.S. gross domestic product (GDP) data. The U.S. dollar may weaken while gold gains against this backdrop.

Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

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