Investors are eagerly awaiting Tuesday’s release of the February consumer price index (CPI) survey by the U.S. Bureau of Labor Statistics, a pivotal report expected to shed light on recent inflation trends and influence the Federal Reserve’s near-term monetary policy stance.
Analysts project that the headline CPI likely rose by 0.4% last month, primarily driven by increased energy costs. This anticipated result would maintain the annual inflation rate at 3.1%. Concurrently, the core CPI, excluding volatile food and energy prices, is predicted to have increased by 0.3% month-on-month, leading to a slight moderation in the year-over-year reading to 3.7% from the previous 3.9%.
While outcomes in line with market expectations may not significantly sway sentiment, any substantial deviation from the consensus estimates could trigger notable price movements across various assets. Consequently, market participants are advised to closely monitor the economic calendar on Tuesday morning.
Potential scenarios and their implications for key assets include:
Upside Surprise (Higher-Than-Expected CPI):
A CPI report exceeding expectations would signal that January’s inflationary surprise was not isolated but rather indicative of a potential resurgence in inflationary pressures. Such a development might prompt the Federal Reserve to revise its forecast for the Personal Consumption Expenditures (PCE) inflation measure upward and potentially reconsider the number of projected interest rate hikes for the year during its March meeting.
In response, interest rate expectations would likely undergo a hawkish repricing, leading to higher bond yields and strengthening of the U.S. dollar. Consequently, gold prices and equities could experience considerable selling pressure.
Downside Surprise (Lower-Than-Expected CPI):
Conversely, if CPI readings fall below forecasts, it would suggest that the previous month’s inflationary data was an anomaly and that efforts to curb inflation are making progress. This outcome could bolster the Federal Reserve’s confidence in achieving its target inflation rate of 2.0%, supporting market expectations for multiple rate cuts in 2024, with the easing cycle potentially commencing in June.
Under this scenario, yields and the U.S. dollar may experience further retracement in the coming days and weeks, potentially fueling renewed bullish momentum in gold prices and risk assets.
