Tomorrow’s release of US CPI Preview is likely the most anticipated macroeconomic event of the week. It comes just as Fed officials are going into their pre-rate decision blackout period. Meaning that there won’t be an opportunity for FOMC members to give their view on the data. The market will have to make its own interpretation, which could lead to higher volatility.
This is especially true in light of the mixed results from the NFP data published last Friday. While the number of people getting jobs was above expectations, the unemployment rate also increased. That left an unclear signal about how tight the labor market really is. This was particularly notable in light of the JOLTS report earlier in the week, showing fewer job quits. Generally, people are more reluctant to quit their job if they are having difficulties finding a replacement. How the Fed will interpret that data is likely to be the subject of intense debate in order to form predictions for what will happen at the FOMC meeting next week.
Looking for a Clear Signal
What could clarify the issue, and push the market substantially, is if there is an unmistakable change in the US CPI Preview trend. As it stands now, the market is expecting inflation to continue its slow drift downwards. That would put the Fed on track, according to the futures market, for a first rate cut in June.
The Fed has said in the past that inflation doesn’t have to come down to target before moving towards easing. They are just looking for a confirmation and firmly established downward trend. That’s because many FOMC members believe the interest rates are restrictive in the current scenario, and would want to bring them to a level that’s considered “neutral”. And when it looks like inflation is coming under control, then they could agree to the first rate cut.
What to Look Out For
The consensus is for the headline inflation rate to tick up to 3.2% from 3.1% prior. But this is likely to be dismissed by the markets, because it’s seen as coming from higher gasoline prices in February. The key is likely to be in the core rate, which is expected to come down to 3.8% from 3.9% prior. Evidently that’s still well above the 2.0% target, but a convincing trend downward would maintain the narrative for rate cuts.
Where there could be some consternation is with the monthly data, which is seen as more “fresh”. A significant move higher in the core inflation rate on a monthly basis could set off alarm bells, even if the annual rate continues to decline. The current expectation is for the core monthly CPI change to drop to 0.3% from 0.4% prior.
Potential Market Moves
Signs that inflation isn’t continuing a steady decline could end up causing the market to price in a later rate cut. That would be something like annual core CPI being higher than the prior month. Or a multi-decimal beat in the monthly reading.
On the other hand, markets could be cheered by a miss of expectations. While that might not change the date for the start of easing, it could cause yields to descend and weaken the dollar. That would likely end up supporting gold and crude once again.
