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US April CPI: To Keep Dividing Expectations?

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Tomorrow will see the release of the most anticipated data of the week, if not the entire month, with the US April CPI figures. The market has been on tenterhooks ever since the surprisingly soft NFP data, hoping that the upcoming CPI figures would confirm that an inflection point has been reached. If inflation has turned around, it might clear the path for the Fed to start cutting rates real soon.

Though other analysts caution that it might not be as simple as that, and the Fed could wait just a bit longer for a little more confirmation. However, the expectations are for a razor-thin differentiation, allowing for a relatively small (and common) deviation to potentially really shake up the market.

Why Has Inflation Been a Problem?

Over the last couple of months, inflation measures have gone in opposite directions. That has caused the market to seriously reevaluate its forecast for interest rates. The main beneficiary of this has been the dollar, but it has come at the cost of a correction in the stock market through most of April. Headline inflation has been ticking higher, but core rates have continued to go down, giving a mixed picture.

The thing is, the Fed is widely expected to start easing up on rates even before inflation comes down to target. All they are looking for is convincing evidence that inflation will actually trend towards the target. So, if headline inflation is rising even though the core rate is coming down, the Fed is unlikely to pull the trigger. So, a turnaround in headline inflation could be significant.

What the Market Is Looking For

The consensus is that headline inflation will come in at an annualized rate of 3.5%, which is unchanged from the prior month. That’s significant because just one decimal of beat to 3.6% will mean that headline inflation is still trending upwards. That would likely dash hopes of a near term rate cut.

But a mere decimal miss to 3.4% would suggest that inflation is already starting to go down, which could lead to increased bets that the Fed will cut sooner. That would likely weigh on the greenback, but could see the stock market jump higher. The consensus expectation essentially implies that the interest rate issue will be punted one month forward to see whether it manages to actually turn around.

The Other Important Indicators

This is supposing that the general trend in core inflation continues as it has been, ticking down slowly. Core CPI change is expected to slow to 3.7% from 3.8% prior, which is evidently well above the target rate. But, since it’s trending in the right direction, it lines up with expectations for easing. It would be unlikely that the core rate would beat or even increase over the prior month without the headline also coming in above expectations. But, if that were the case, it could end up thoroughly convincing the market that there won’t be a rate cut until the end of the year at the latest. That would be good for the dollar, but might end up depressing the whole market.

A result in line or lower than expectations for US April CPI will be a breath of fresh air for the markets after the Fed’s GDP Now forecast increased its projections for the economy this quarter to 4.2% annual growth. It was at just 3.3% a week ago. A stronger economy can also push inflation up, and could keep the Fed on hold for longer as well.

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