On August 12 at 20:30 Beijing time, the United States will announce the Consumer Price Index for July. The market expects the overall CPI year-on-year increase to possibly decrease from 3.5% to 3.4%, and the core CPI year-on-year increase to possibly decrease from 2.6% to 2.5%.
From the predictions, U.S. inflation is still gradually cooling. However, what is truly worth paying attention to tonight is not only the highs and lows of the data but also the gap between the actual results and market expectations. The trends over the past few years have repeatedly proven that similar CPI data in different policy environments can lead to completely different market reactions.
What happened in the market after the last CPI announcement?
Data released on July 14 showed that the U.S. CPI for June rose 3.5% year-on-year, lower than the market expectation of 3.8%; it decreased by 0.4% month-on-month, marking the largest single-month decline since April 2020.
The cooling of inflation alleviated the market's concerns about the Federal Reserve continuing to raise interest rates. On that day, the Nasdaq index rose by 0.90%, and the S&P 500 index rose by 0.38%, with technology stocks leading the way. However, this significantly better-than-expected report did not drive a broad rally in U.S. stocks. The market had already prepared for the decline in inflation, and some positive news had been priced in earlier.
While data performance is undoubtedly important, how much the market had bet on it previously will also affect the trends.
My view on tonight's CPI
I tend to believe that both the overall CPI and the core CPI for July will slightly decline, with the final results likely close to market expectations. The report may lean towards being favorable, but the impact will be limited, making it difficult to change the Federal Reserve's policy judgment based solely on one set of data.
The cooling of last month's CPI was mainly driven by a drop in energy prices, with the energy index decreasing by 5.7% that month, including a 9.7% decrease in gasoline prices. Such a decline is hard to replicate continuously, so even if the July CPI declines year-on-year, the month-on-month data may rise again.
Recently, the situation in the Strait of Hormuz has once again impacted the oil market, and oil price fluctuations have added uncertainty to future inflation. Tonight's data may not fully reflect recent changes in oil prices, but it will influence the market's judgment on price trends in the coming months.
At the same time, core inflation is also worth continuous attention, as well as whether housing and service prices can cool down simultaneously. The market has already priced in some expectations of a decline in inflation, so if the data only slightly underperforms expectations, U.S. stocks and crypto assets may gain temporary support, but will likely return to discussions on specific components and Federal Reserve policies. If the CPI unexpectedly comes in hot, the easing expectations brought on by recent weaker employment will be challenged, and the market may reassess the future interest rate path.
Moderate cooling of inflation is the basic expectation at this point; however, what may trigger significant fluctuations is a deviation from this expectation in the data.
The first wave of movement may not be the final answer
In the first minute after the CPI release, algorithmic trading usually places orders quickly based on the gap between the actual value and the expected value. Then, the market begins to analyze core inflation and specific components, and the second round of pricing gradually unfolds.
Therefore, even if the data seems favorable on the surface, the market may rise first and then fall; if the data seems unfavorable, the market may recover losses after digesting the details. Whether positions are crowded and whether expectations have been priced in early will all impact the final direction.
From the sharp decline in September 2022 to the moderate rise after last month's CPI cooling, history has shown two completely different reactions.
Tonight at 20:30, investors need to pay attention not only to a set of inflation numbers but also to the distance between it and market expectations, as well as whether it is enough to change the Federal Reserve's policy judgment.
Data determines the first wave of fluctuations, expectations determine the amplitude of fluctuations, and the policy path determines how far the market can go.
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