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The March CPI report represents a crucial moment for the timing of interest rate cuts this year.
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Inflation is expected to cool in March after two strong CPI reports to start 2024.
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Here's a preview of how markets will react to March's inflation data.
All eyes are on the March CPI report, which represents a defining moment for us Possible interest rate cuts this year.
The inflation report, due for release on Wednesday morning, is expected to show that inflation will continue to slow after that Two fixed reports in January and February.
Consensus views point to a 3.7% annual jump in the core CPI, which would be slightly lower than the previous month's reading of 3.8%. The monthly core CPI is expected to come in at 0.3% in March, compared to a reading of 0.4% in February.
According to Thierry Wiesmann, a strategist at Macquarie University, the ambiguity of various labor market indicators means that the CPI report has become more important.
“It is precisely because US labor market indicators are so ambiguous (employment data strong, but employment surveys weak) that makes US inflation data more important as a driver of Fed policy expectations in the next few months.” Weisman said.
With potential interest rate cuts hanging in the balance, “tomorrow’s March CPI report will be of utmost importance,” Weissman said.
Fed funds futures indicate that the market sees a 50-50 chance that the Fed will cut interest rates in June, down from the 70% cut odds in June earlier this year.
Megan Sweber, interest rate strategist at Bank of America, expects inflation measured by the Consumer Price Index to cool in March, increasing the chances that the Fed will cut interest rates at its June policy meeting.
“We expect core CPI inflation to decline to 0.2% m/m due to a slight decline in commodity prices and lower price pressure from essential services,” Sweber said in a note on Tuesday. “If this materializes, the market will likely price in a greater likelihood of a rate cut in June and 10-year interest rates will struggle to breach 4.50%.”
JPMorgan's trading desk emphasized the importance of the March CPI report, as it could significantly shape the narrative for stocks and bonds going forward.
“The US CPI reading appears to have the greatest potential to further shape the narrative if it surprises materially up or down,” JPMorgan's Andrew Tyler and Ellen Wang said in a note on Tuesday.
Here are three scenarios that could play out based on the March CPI report, according to JPMorgan.
1. Built-in CPI printing
In this scenario, JPMorgan expects YTD trends to remain in place. “That is, stocks are trending higher led by large caps, although we could continue to see more rotation towards broader cyclical value.”
2. Too hot CPI printing
In this scenario, a very hot inflation report could lead to a “minimal repeat” of what happened in August-October, where inflation fears led to a sharp sell-off in stock prices.
“The absence of recession fears and strong economic growth are likely to limit the absolute magnitude of downside for equities,” JPMorgan said. “In this environment, we can see further transformation in sectors such as energy and materials.”
3. CPI printing is very exquisite
Stock market investors are likely to be the happiest in this scenario, according to JP Morgan, as it has the “potential to cause stocks to move rapidly upward.”
“Areas that could outperform include lagging credit, regional banks, renewables, and perhaps utilities and real estate. Additionally, if interest rate cut expectations are pushed forward and cause a sharp rally, this could be beneficial for cyclical and value stocks.” Small caps also perform better, JP Morgan said.
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