US inflation data is set for release today at 4:30 GMT+4, and the markets are awaiting how the real reading come out compared to both the expected and previous readings. Forecasts indicate that annual inflation will continue to slow for the eighth consecutive month to 6%, compared to 6.4% in the month prior. This would be the lowest CPI reading since October 2021.
However, the Fed still stressed that inflation needs to return to its target level of 2%, and that monetary tightening will continue as long as inflation remains above this level. The Fed also confirmed that interest rate expectations at its March meeting will depend on the nature of economic data. Markets will therefore focus on whether today’s inflation reading will show optimism to slow the pace of interest rate hikes or to hike more aggressively, perhaps by half a percentage point.
Markets will also be considering the recent collapse of SVB, which could even limit the impact of today’s inflation data. Several US banks have started to show signs of struggling in response to the Fed’s tighter monetary policy. Bankruptcy announcement from three banks so far, including SVB Financial Group, Signature Bank and Silvergate Capital, could mean that today’s CPI reading isn’t the most important thing on investors’ minds, and that some surprising rate decisions could be on the way from the Fed. Golden Sachs even expects the Fed not to raise interest rates at its March 22 meeting.
The issuance of today’s CPI data may be accompanied by fluctuations in the financial markets, with a reminder that the initial market reaction, regardless of the nature of the real reading, may be sharp and volatile initially before the market returns to stability.
It is necessary to remember that traders have different ideas and convictions in the way they interpret the information issued, and therefore prices cannot move 100% according to that information. The expected scenarios as per our analysts are outlined as follows:
- A reading higher than the previous reading (6.4%)
This would translate to fears that inflation is rising again, and could push the Federal Reserve to continue at a strict pace with regard to interest rates. This may be positive for the US dollar and negative for stocks and gold.
- A reading at or below expected (6.0%)
Perhaps this will convince the Fed to halt the pace of raising interest rates, and thus this may be negative for the dollar and positive for stocks and gold.
- A reading higher than expected, but lower than the previous (between 6.0% and 6.4%)
This would be the most confusing situation for markets and would bring expected volatility before prices take a specific direction.
However, we reaffirm that predictions will be very difficult in light of recent market developments. We will see how the Fed tackles today’s data and how regulators will deal with the banking sector.
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