What to expect from CPI data on Tuesday

The inflation data is the most important event that the markets expect next week. The data will be released on Tuesday at 13:30 GMT.

The market expectation is 0.4%. I want to remind you that according to Powell’s statement, the inflation target for FED is “closer to 2%”. Here are his important quotes from his last speech:

The disinflationary process, the process of getting inflation down, has begun and it’s begun in the goods sector, which is about a quarter of our economy, but it has a long way to go. These are the very early stages.

If we continue to get, for example, strong labor market reports or higher inflation reports, it may well be the case that we have do more and raise rates more than is priced in.

We expect 2023 to be a year of significant declines in inflation. It’s actually our job to make sure that that’s the case, My guess is it will take certainly into not just this year, but next year to get down close to 2%.

Thus, for a positive scenario, the market should constantly see declining inflation data, if inflated data comes out, this will instantly lead to the pricing of a higher interest rate in the market. At the moment, the market priced an interest rate of 4.75% -5.00% until the end of 2023.

Data from CME FedWatch

And 5.00%-5.25% in May 2023.

Data from CME FedWatch

Powell has already signaled several times that if they continue to see strong performance, in particular in the labor market, then it is quite possible that they will increase the rate hike horizon above 5.25% in order to achieve the desired results as soon as possible.

Also, it is very important that Powell admits the possibility of a rise in inflation in the US, “due to the opening of China after covid, and also in view of the events in Ukraine.”

What to expect on Tuesday (CPI data release)

The current rate is now at 4.75% and the market expects another 0.25% increase in May. I don’t think there are any surprises here and it’s quite possible that we’ll even see lower than expected CPI data this Tuesday. Simply by the fact that the year has just begun and some terrible events that could disperse inflation have not yet occurred.

But the fact that during the year we will still see the negative that will affect inflation and force the FED to increase the rate hike horizon above 5.25%, I have no doubts. Therefore, I think that we expect more negative from the FED for risky assets this year, but not now, a little later. On Tuesday, I tend to be more positive.

History of CPI data:

CPI history data

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