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US inflation report: How to trade the event
What: US February inflation report
When: 12:30 GMT (13:30 CET)
Expectation: CPI YoY 3.1% vs 3.1% (Jan) and core CPI YoY 3.7% vs 3.9% (Feb)
How will market likely react? If the core inflation rate comes out higher than estimated (upside surprise) then it will likely be seen as really negative as the market is most likely in the downside surprise camp in line with the “soft landing” scenario. A softer or mildly hot print reaffirms US disinflation and soft-landing hopes. Only a very hot print (core CPI above 0.5% MoM) could cause Fed to reconsider its 75bps rate cut bets for this year.
The below shows our views ahead of the US inflation report.
Why does it matter? US inflation reports have for two years been a key events impacting the market’s pricing of Fed’s policy rate. Earlier this year the market was pricing as many as seven US rate cuts, but recent inflation reports showing persistent inflation has caused the market to now only pricing in four rate cuts. As the chart below shows, all inflation components except core services have come down and this is the reason why the market will obsess about the core CPI rate.