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
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