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All Eyes on U.S. Inflation: Stocks May Sink if CPI Data Tops Forecasts

By:Ilya Spivak

Stocks may turn lower, threatening to end a five-month rally if U.S. inflation data tops forecasts and dilutes the market expectations for Fed interest rate cuts

  • U.S. inflation data in focus as markets doubt Fed rate cut outlook.
  • A string of hotter-than-expected data hints CPI may top forecasts.
  • Stocks may fall as the priced-in scope for easing narrows further.

Wall Street awaits expectantly as the Bureau of Labor Statistics (BLS) prepares to unveil the March edition of its closely watched report on U.S. inflation.

The headline consumer price index (CPI) gauge is expected to show that price growth accelerated to 3.4% year-on-year, the fastest in three months. However, the core measure excluding volatile food and energy prices–the focus for Federal Reserve officials trying to squeeze sticky inflation out of its holdout in the service sector–is penciled in for a decline.

Experts expect the core rate to inch down to 3.7% year over year, the lowest since April 2021.

Markets doubt Fed rate cut view as inflation data looms

Progress here is mission-critical if the Fed is to justify rate cuts this year. Central bank officials stuck with a forecast calling for three 25-basis-point (bps) rate reductions in 2024 when they updated their Summary of Economic Projections last month. That matched December’s call, despite an upgrade of economic growth and inflation forecasts.

U.S. consumer price index
Source: BLS

For their part, financial markets are dubious. Fed funds futures are pricing in 58 bps in stimulus this year. That amounts to two standard-sized cuts and a less-than-even 32% probability of a third one. That is a sharp adjustment from investors’ call for 150 bps in easing at the beginning of the year.

The adjustment echoes a steady stream of better-than-expected economic news-flow. Analytics from Citigroup reveal that realized results on U.S. data outcomes have increasingly outperformed relative to baseline projections. A mild soft patch from mid-February gave way to reacceleration from the second half of March.

Stocks at risk if rate cut expectations come down further

This hints that market-watchers’ models are understating the economy’s vigor, which may set the stage for an upside surprise on the CPI release. This might nudge the markets toward diluting rate cut expectations further. That might put the brakes on a blistering stock market rally launched alongside swelling rate cut hopes in late October.

Tellingly, the bellwether S&P 500 has returned a loss of 1.24% since the Fed’s last meeting on March 20 affirmed policymakers’ three-cut baseline for this year. The tech-tilted Nasdaq is down 1.62% over the same period. The small-cap Russell 2000 has done only a little better, down 0.5%.

futures-implied 2024 fed outlook vs. S&P 500
Source: CME

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

For live daily programming, market news and commentary, visit tastylive or the YouTube channels tastylive (for options traders), and tastyliveTrending for stocks, futures, forex & macro.

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