US CPI Preview: Will Markets Break as Trump and Powell Clash?
US CPI Preview: Will Markets Break as Trump and Powell Clash?
By:Ilya Spivak
Can the stock market hold up as the President Trump and the Fed clash on rate cuts? All eyes are on US CPI data.
- Fed Chair Powell has pushed back hard on White House pressure to cut rates
- US CPI inflation data and its impact on policy expectations are now in focus
- Stock markets may suffer if sticky price growth tells the Fed to stay on hold
Stock markets found a way higher on the eve of critical US inflation data even as the clash between Federal Reserve Chair Jerome Powell and President Donald Trump shifted into high gear. The bellwether S&P 500 index erased intraday losses of as much as 0.79% to close up 0.16%.
The Fed issued a bombshell late Sunday when Chair Powell revealed in a statement to the public that the central bank was “served [with] grand jury subpoenas, threatening a criminal indictment [related to my testimony last June concerning] a multi-year project to renovate historic Federal Reserve office buildings.”
President Trump vs. Fed Chair Powell: It’s heating up
“[This] unprecedented action should be seen in the broader context of the administration's threats and ongoing pressure,” Powell said bluntly, dismissing the accusations as “pretexts”. “[This threat] is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the President,” he concluded.
Gold prices surged against this backdrop, jumping 2.53% to a new record high. The US dollar meandered lower over the course of the day, but the orderly descent showed no signs of panic. The currency fell 0.37% against an average of its major counterparts. Treasury bonds are holding steady within familiar trading ranges.
Against this backdrop, traders will need to decide what to make of December’s consumer price index (CPI) report, a critical input into their ongoing debate with central bank officials about the 2026 rate cut path. The Fed has stubbornly insisted on just one 25-basis-point (bps) cut this year, while the markets have priced in two of them.
Stock markets in the balance with all eyes on US CPI data
The data from the Bureau of Labor Statistics (BLS) is expected to show that headline inflation held steady at 2.7% year-on-year, matching November’s four-month low. The core measure excluding volatile food and energy prices – the focus for Fed policymakers – is seen rising to match after hitting 2.6%, the lowest since March 2021, in the prior month.
A closely watched “nowcast” from the Cleveland Fed points to a steep offramp for inflation in December and January. Headline and core CPI are seen converging at 2.6% at first, then dropping to 2.24% and 2.45% respectively. The markets would probably embrace such undershooting and its dovish implications for Fed policy.
However, October’s government shutdown has wreaked havoc on the BLS data set. That month’s CPI report was cancelled altogether, and November’s figures marked the biggest core CPI divergence from the Cleveland Fed’s model since April 2020. That was amid the worst of the data collection lapses at the outbreak of the COVID-19 pandemic.
This brings an unusual level of uncertainty into a situation that is already bubbling with explosive potential. Unexpectedly hot CPI data would be doubly painful for traders, telling the Fed that its credibility demands it resist cutting rates even as that aggravates the White House further. Stock markets may not hold up for long under such stress.
Ilya Spivak, tastylive head of global macro, has over 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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