Global financial markets are closely monitoring the release of the latest US Consumer Price Index (CPI) data on Wednesday, seeking guidance on the Federal Reserve’s next policy move following last week’s weaker-than-anticipated jobs report and mixed signals from central bank leaders.
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AAPLCPI expected to show modest price gains
The Bureau of Labor Statistics is scheduled to publish the July CPI at 8:30 a.m. ET. Economists surveyed by Dow Jones estimate that headline inflation will rise by 0.1% month on month. Core inflation, which removes the impact of volatile food and energy prices, is projected to increase 0.2% over the same period.
On a yearly basis, headline inflation is forecast to edge down to 3.4%, compared with 3.5% in June. Core inflation is expected to slip to 2.5% from 2.6%. These figures remain above the Federal Reserve’s long-term inflation goal of 2%, but another month of modest price growth may reinforce the case for keeping interest rates steady, potentially enhancing risk sentiment.
Labour market data shifts focus toward inflation
The CPI figures arrive just days after US payrolls data showed an unexpected loss of jobs in July. The surprising weakness caused many investors to temper their expectations of a near-term rate hike, drawing the spotlight to inflation data as the next bellwether for monetary policy.
At the Federal Reserve’s July policy meeting, officials opted to hold interest rates unchanged, though three out of twelve policymakers supported a rate increase. Since then, market sentiment has remained unsettled, as investors try to balance softer labour data with signals that inflation is slowly moderating.
Kevin Warsh, who has served as Chair of the Federal Reserve since May, continues to navigate a complex backdrop of cooling employment and persistent price pressures as he seeks to achieve both stable prices and steady economic growth.
Mini dictionary: Kevin Warsh is the current Chair of the US Federal Reserve, responsible for overseeing the country’s central banking system and for setting monetary policy.
Market reactions hinge on inflation trajectory
Analysts expect the July inflation report to be incremental rather than disruptive, but any deviation from forecasts could still prompt a reaction across asset classes.
Adam Schickling, economist at Vanguard, suggested that some of the sharper price declines seen in certain categories in June may revert to more typical levels, though the overall trend remains positive as inflation moves closer to target. He emphasized that while inflation remains “sticky and persistent,” it continues to make gradual progress toward the Fed’s 2% objective.
Joe Brusuelas, chief economist at RSM, noted that a report in line with expectations would likely strengthen the Federal Open Market Committee’s decision to remain patient on rates. He said that such data could “provide an assist” for Chair Warsh as the central bank weighs next steps.
“If we get a July CPI report anywhere near my forecast, the balance of the committee is going to look right through the supply shock, and the FOMC will remain on hold for the remainder of the year,” Brusuelas said, adding that the figures will help support the current policy stance.
Dominic Pappalardo, chief multi-asset strategist at Morningstar Wealth, said ongoing moderation in inflation could lessen the urgency for further tightening. He cautioned, however, that a stronger-than-expected reading might trigger a pullback in equities, as investors prepare for the possibility of renewed rate hikes.
JPMorgan’s trading desk outlined five scenarios for the S&P 500’s reaction to the inflation report. Should core CPI land between 0.2% and 0.25%, the S&P 500 could gain between 0.25% and 0.75%. A reading exceeding 0.3% could send the index down 1.5% to 2.5%, while an unexpectedly low print below 0.15% might lift it by 1% to 2%.
| Core CPI (MoM) | S&P 500 Projected Move |
|---|---|
| Below 0.15% | Up 1% to 2% |
| 0.2% – 0.25% | Up 0.25% to 0.75% |
| Above 0.3% | Down 1.5% to 2.5% |
In a note to clients, the JPMorgan team explained that the US has largely escaped a surge in inflation stemming from the Middle East conflict. Markets are now keen to see if core inflation remains resilient or if a new period of disinflation is emerging.
Investors reposition ahead of data
Traders have begun adjusting strategies in advance of the CPI release. The CME FedWatch tool shows an approximately even split on the possibility of a September rate hike, after the jobs report reduced the perceived likelihood of immediate action by the central bank.
Many market participants are now focused on the potential for interest rate moves in October or December, particularly if inflation does not ease meaningfully in coming months.
The US dollar strengthened 0.1% in Asian markets, with the dollar index reaching 99.89 amid prevailing caution. Analysts from DBS indicated that a weaker-than-expected inflation report could prompt traders to reduce long-dollar positions in favor of currencies such as the euro, Japanese yen, and New Zealand dollar.
At the same time, Brent crude oil climbed 0.9% to $89.69 per barrel, driven by ongoing geopolitical tension in the Middle East and renewed concerns over the global energy supply chain.
Chicago Fed President Austan Goolsbee reiterated that the central bank’s top priority remains curbing inflation, even amid signs of softening in the labor market. He pointed to the delicate balance facing policymakers as they approach the upcoming interest rate decisions.
