PREVIEW: US CPI data due at 12:30GMT/08:30EDT on Tuesday March 12th; annual headline CPI seen unchanged; annual core CPI expected to ease

EXPECTATIONS: The rate of headline CPI is expected to rise +0.4% M/M in February (prev. +0.3%), with the annual rate remaining unchanged at 3.1% Y/Y; the core rate of inflation is expected to rise +0.3% M/M (prev. +0.4%), with the annual rate of core inflation seen slipping 0.2ppts to 3.7%.

FED PRICING: Traders upped hawkish bets on the expected path for policy rates following January's pick-up in CPI and will look to the February data to help refine expectations of when the Fed is likely to cut rates. Currently, the market has discounted the prospects of three rate cuts this year and assigns a decent probability of a fourth. Policymakers have been looking through a single months' data, and are focussed on recent trend rates; in January, the rate of 3-month annualised core CPI rose to 3.9% (from 3.3%), while the 6-month annualised rate rose to 3.5% (from 3.2%).

RECENT COMMENTARY: Fed Chair Powell last week told lawmakers that while inflation remains above 2%, it has eased substantially of late. Still, Powell stated that it would not be appropriate to reduce the policy rate until policymakers had greater confidence that inflation was moving sustainably towards 2%, adding that they were not looking for inflation to move all the way down to 2%, instead, the sustainability of the move was more important in assessing the outlook. He also said that the Fed was not looking for 'better' inflation readings than we have had recently, but was looking for more of what we have seen.

CORE CPI SCENARIO ANALYSIS VIA JPMORGAN:

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  CORE CPI ABOVE 0.4% M/M: JPM says the S&P 500 will lose between 1.75-2.25%, as such an outcome would likely reflect a stronger than expected gain in housing prices and material strengthening in Core Services. "Fears of a second peak in inflation would likely manifest in increased options activity reflecting more rate hikes this year and potentially more yield curve inversion," which would be negative for risk assets, potentially triggering a momentum unwind.


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  CORE CPI BETWEEN 0.3-0.4% M/M: JPM says the S&P 500 will lose between 0.5-1.0%, as the bank says this would reflect clear signs of core inflation accelerating, with headline inflation unable to break below 3%.


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  CORE CPI BETWEEN 0.2-0.3% M/M: JPM says the S&P 500 will rise between 0.25-0.75%; an in-line reading would result in a muted price reaction. JPM says that a print at the lower end of that range would build comfort in the disinflationary trend, though not enough to reprice Fed expectations; equities could take this as a sign to continue rotating into Cyclical/Value sectors.


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  CORE CPI BETWEEN 0.1-0.2% M/M: JPM says the S&P 500 will rise between 1.0-1.5%. "If we saw a step down in Core Services, this likely restarts the calls for earlier rate cuts, again supportive of the current Equity rotation especially if the yield curve bull steepened," the bank writes.


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  CORE CPI BELOW 0.1% M/M: JPM says the S&P 500 will gain between 1.5-2.0%. "This would likely coincide with the bond market bringing May rate cut expectations above 50% from its current ~23% level."

11 Mar 2024 - 15:29- Fixed IncomeData- Source: Newsquawk