Wall Street’s favorite macro-assumption that inflation will “enough” cool to allow the Federal Reserve to cut rates in a predictable timeline faces a serious stress test over the next few weeks.
Next week, on February 13, the Bureau of Labor Statistics is scheduled to release January’s Consumer Price Index. The Producer Price Index will be released on February 27, 2019.
The pace of improvements must slow down for traders to reconsider their policy.
The dollar, stock prices, and rates are all affected by both prints.
Inflation double feature: CPI first, PPI a late-stage spoiler
CPI is at the forefront. CPI is the front line.
Investors are more interested in the core numbers (which exclude volatile components like food and energy), and the stubborn components, such as housing and service that have historically persisted.
If the core CPI is higher than expected, this could cause markets to delay their planned cut-off dates.
Even a smaller-than-forecast decline will be interpreted as “disinflation stalling.”
PPI plays spoiler duty. The producer price is what the firm pays for inputs and goods before they reach their customers.
The PPI may indicate that consumers’ relief from lower prices for goods is only temporary.
The PPI is a hint at the next inflation rate.
PPI is scheduled to be released by the BLS later in the month. This makes it the ideal follow up after the CPI.
The print will be read by the markets
Expect a swift hawkish price increase if the core CPI remains firm but PPI is showing pipeline pressure.
The two-year Treasury yield would be the first to rise, as it is most sensitive.
This yields-up movement tends to hurt long-duration stocks, while giving relative boost to financials and cyclicals.
In contrast, evidence of continued disinflation in service and pipeline price would confirm the “cuts will come” narrative on the market and flatten yields at front and support risky assets.
Reuters reports that markets expect multiple cuts to be made in 2026. This is a background which makes today’s sensitivity for upside surprises even greater.
The traders don’t require a single printing to “break” the markets. A mixed CPI/PPI sequence can be sufficient.
Nuance is required when, for example, the headline CPI falls but services are firmer, or an tame CPI follows by a surprise PPI increase.
This ambiguity causes volatility to increase as investors try to price probabilities based on rate reductions, growth scenarios and dollar strength.
The most vulnerable markets
This shortlist will be closely monitored by investors in real-time:
- 10-year Treasury yields : Front-end movements signal policy repricing.
- Dollar Strength in comparison to major competitors: An inflation shock often results in a stronger dollar.
- Rate sensitive equities : Mega-cap growth will be divergent from homebuilders and small-caps.
- Volatility, credit spreads and risk:they indicate whether the moves are ordered or if they turn into a real risk-off episode.
Test the real story behind rate cuts
These numbers will be less of a trial and more like a judgment that is unfolding.
CPI is the story, but PPI validates or complicates it. Markets will react faster than policymakers.
Investors are required to re-price the timing and magnitude of the cuts if inflation stops improving.
This is the real risk. Not a sudden spike in prices, but the end of a comfortable policy arc.
These next prints will not only populate the charts but also rewrite what we expect about rates and risks for many months.
The post Inflation Double Feature: Two data prints which could change the market’s rate-cut fantasies may be updated as new information becomes available
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