US CPI Preview: Markets could be sensitive to an upside surprise US CPI Preview: Markets could be sensitive to an upside surprise US CPI Preview: Markets could be sensitive to an upside surprise

US CPI Preview: Markets could be sensitive to an upside surprise

Macro 5 minutes to read
Charu Chanana

Head of FX Strategy

Summary:  US inflation is scheduled to be released this week, and markets will be alert to the release in order to assess whether the steep easing cycle priced in for the Fed could actually come through. Consensus expects headline CPI to pick up slightly while core could continue to ease, and we expect greater sensitivity to an upside surprise rather than a downside surprise. In this article, we list the possible scenarios and how different asset classes could respond.


Markets are on a high alert this week as the December US inflation data is due to be released on January 11. We have discussed before in this primer how inflation can impact portfolios and different asset classes. While policy impact in the US is centred more on the PCE inflation, markets continue to deem high importance to CPI releases as well. In that regard, it is essential to understand what to expect from the CPI release this week and how it can move the different asset classes.

Disinflation trends could be challenged

Inflation has been on a downward trajectory since mid-2022 after hitting 40-year highs of 9.1% YoY. Much of that deceleration has come from base effects, because price pressures were elevated for most of 2021 and 2022. In addition, energy prices have cooled after the initial bump higher post Russia’s invasion of Ukraine. That, together with increased supply, helped cool airfares. Moreover, as supply chains were restored post-covid and Ukraine invasion, goods prices such as those for furniture, used cars and apparel also cooled. Falling gasoline prices could continue to pull goods inflation lower, but recent tensions in the Red Sea area are a key risk to watch as it is a key transit area for global trade.

Meanwhile, wages and services inflation have proved rather bumpy, creating severe choppiness in the last leg of inflation’s move back towards the 2% target.

Rental inflation is the key element to watch for, as that will likely be the major contributor to the next leg of disinflation, but so far it has proved sticky. Meanwhile, inflation expectations as noted in the New York Fed survey released yesterday have declined to their lowest levels in three years, providing further calm on the inflation angst.

Consensus expectations for December CPI are as below:

  • Headline: 3.2% YoY (0.2% MoM) from 3.1% (0.1%) in Nov
  • Core: 3.8% YoY (0.3% MoM) from 4.0% (0.3%) in Nov

Market’s rate cut pricing is still well above the FOMC

When analysing data releases and their potential market impact, it is important to understand the current market thinking and biases. Markets are currently in a mood to re-assess whether the five or six rate cuts priced in for this year, way beyond the three that the FOMC expects, could come true.

The blowout NFP number last Friday prompted an initial re-look at those expectations, but the weaker details of the jobs report later reversed the reaction. Any growth data that points to a healthy economy, fuelling soft landing hopes, will again question the extent of rate cut pricing. Upside surprise in inflation numbers, likewise, could move rate cut expectations out later into 2024. However, a downside surprise in inflation may not be enough of a trigger to add to the rate cut pricing for now, which is anyway proving to be more aggressive that policymakers’ forecast. This suggests that markets could be more sensitive to an upside surprise in the CPI data this week, rather than a downside surprise, and this necessitates considering protecting your portfolio.

Investment implications

If CPI data throws an upside surprise this week, we could see March rate cut pricing taking a dip to possibly below 50%, and possible asset class moves could be as follows:

  • Equities: lower
  • Bonds: lower (yields go up)
  • FX: Dollar higher, while JPY, EUR, AUD could weaken
  • Commodities: Gold weakens as yields rise, oil could slide as demand concerns grow 

In case of a downside surprise, we expect moves to be more muted, but knee-jerk reactions can still not be discounted. Market pricing for rate cuts may not see a big change unless the miss is significant. Asset class reactions could be as follows:

  • Equities: sideways to higher as markets get a confirmation of disinflation continuing
  • Bonds: higher (yields go down)
  • FX: Dollar lower, JPY could gain, tactical gains in EUR, AUD, GBP
  • Commodities: Muted reactions likely but gold stands to gain unless real yields are still seen too high, oil could weaken as demand concerns remain

If the CPI data is in-line with market expectations, and Core CPI actually comes in below the 4% mark, this would be an added vote of confidence to market’s soft-landing hopes.

  • Equities: higher
  • Bonds: lower (yields go up)
  • FX: Dollar sideways to lower, EUR, GBP, AUD could gain while JPY could weaken
  • Commodities: Gold stands to lose in a soft-landing environment, oil could gain as demand concerns ease

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank (Schweiz) AG
The Circle 38
CH-8058
Zürich-Flughafen
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law.

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.