US CPI Preview: Will Stocks Struggle as US Inflation Ticks Up?
US CPI Preview: Will Stocks Struggle as US Inflation Ticks Up?
By:Ilya Spivak
Stocks and the dollar hang in the balance as all eyes turn to US inflation data.
- US CPI data is in focus as Fed rate cut speculation continues to churn
- Markets and central bank officials are still far apart on easing scope
- Stocks may fall as the US dollar gains if CPI is warmer than expected
Stocks stalled while gold prices fell as the dollar rose alongside Treasury bonds as financial markets prepared for the release much-anticipated US inflation data. The release will help shape expectations about the health of the world’s largest economy and guide Federal Reserve policy speculation, a key driver for price action across major asset classes.
The Bureau of Labor Statistics (BLS) is expected to report that the headline consumer price index (CPI) rose 2.8% year-on-year in July. The core measure excluding volatile food and energy prices – a focal point for central bank officials – is expected to hit 3%. Taken together, that would put price growth at the fastest since February.
Markets seem laser-focused on US inflation data
Beyond the banner year-on-year figures, traders will be keen to see how CPI evolution since June will impact three- and six-month annualized change readings that Fed officials look at to gauge nearer-term trend dynamics. Results in line with expectations would push these higher-frequency indicators in the wrong direction for a second month.
As it stands, the markets are convinced that a standard-sized 25-basis-point (bps) interest rate cut is on the menu when the Fed’s policy-steering Federal Open Market Committee (FOMC) issues its next decision in September. Fed Funds futures price the probability of that outcome at a commanding 86.4%.
A second cut is then expected to appear in either October or December, the last remaining FOMC meetings of the year. In all, traders have discounted 51bps in stimulus this year. That is almost perfectly in line with the Fed officials’ own forecast, last updated in June.
Stocks may face pressure as the US dollar gains on warm CPI results
Looking ahead to 2026 however, a yawning disparity remains between the central bank and market participants. Chair Powell and company wrote down a single 25bps reduction in their Summary of Economic Projections at mid-year. Traders have priced in 67bps, pointing to at least two cuts a 68% probability of a third one.
This points to the markets’ appetite for easing, and their likely disappointment in the event that it seems more distant if the CPI report registers too warm for comfort. Stocks may wobble while the US dollar gains, pressuring gold prices lower, if a rate cut in September begins to look less certain.
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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