Only a Growth in US Consumer Inflation Above Forecast Will Weigh Negatively on Markets (Could Trigger Renewed Growth in #SPX

[Ben Graham]

Global markets are tense, awaiting the release of the US consumer inflation report, which is especially intriguing ahead of next week's FOMC rate decision—especially after yesterday's producer inflation figures.

Let's start with the producer inflation (PPI) data, which came in unusually low. The Producer Price Index fell year-over-year to 2.6%, versus a consensus forecast of 3.3%. Notably, the previous value was revised down from 3.3% to 3.1%. Recall that in August, a sharp jump in PPI shocked the market and reduced expectations that the Fed would cut rates this month. Now, with the CPI report imminent, the PPI numbers advise caution in interpreting these inflation measures.

Now to today's consumer inflation data, which, as usual for a consumer-driven and service-based US economy, plays a much bigger role than the PPI.

Today's CPI report is expected to show an increase both month-over-month (from 0.2% to 0.3%) and year-over-year (from 2.7% to 2.9%).

The likely driver is the gradual increase in retail prices as companies react to Trump's higher import tariffs, as well as higher gasoline and food prices in supermarkets. At the same time, rents are expected to decrease. Core CPI (excluding food and energy) is forecast to remain at 3.1%, the same as last month and at its February peak. The monthly reading should maintain last July's rate of 0.3%.

How might the markets react to the CPI report?

If the data aligns with consensus, it is unlikely to significantly impact expectations for a rate cut next week. But if the numbers rise, or conversely fall—even modestly—big moves are possible.

Scenario: CPI Above Forecast

If CPI is higher than forecast, stocks are likely to see a local corrective dip, since the probability of a 0.50% rate cut drops (currently, fed funds futures price this at 8%). Still, a 0.25% cut is fully priced in and virtually certain.

Scenario: CPI Below Forecast

If inflation unexpectedly drops, the likelihood of a 0.50% cut will jump—the likely market reaction: strong demand for stocks, cryptocurrencies, and commodity assets—including gold. The dollar will come under pressure, and the ICE dollar index will fall to 96.70.

Overall, I judge the near-term outlook to be moderately positive for risk assets and negative for the dollar.

Forecast of the Day:

#SPX

The S&P 500 CFD is trading below resistance at 6547.00 ahead of the US CPI report. If inflation doesn't come in above expectations or even falls, expect continued growth to 6600.00. The 6553.00 level could serve as a buying point.

Litecoin

The cryptocurrency is trading below resistance at 117.60 ahead of the CPI. A break above this level on the back of dollar-negative news could drive LTC up to 123.40. The 118.10 level can be used as a buying point.

The material has been provided by InstaForex Company - www.instaforex.com