【MACRO Insight】CPI Report Outlook: Market Volatility and Key Turning Points in Fed Policy

The recent turmoil in the stock market has options traders increasingly worried that the upcoming Consumer Price Index (CPI) report could cause more volatility. Surging bond yields and strong employment data have made this CPI report a hot topic. Stuart Kaiser, head of U.S. equity trading strategy at Citigroup, said he expects the S&P 500 to fluctuate 1% on January 15, which is the largest implied volatility on the CPI data release date since the regional bank turmoil in March 2023.

Traders expect the CPI data to provide clarity on the path of rate cuts this year. Several large banks have changed their forecasts, expecting the Fed to cut or delay rate cuts. Bank of America now believes the Fed will not cut rates this year, a change in tone that pushed stocks lower at the beginning of the year.

Brent Kochuba, founder of options platform Spot Gamma, said that cooling CPI data could cause the S&P 500 to quickly rise above 5,900, while hot CPI data could cause the S&P 500 to accelerate its decline, which would correspond to a sharp jump in the volatility index (VIX). Concerns about sticky inflation and the Fed's path to curb inflation have pushed the VIX to 20, indicating traders' concerns.

The CPI report will add to the puzzle of data that U.S. traders need to analyze for more clues about the Federal Reserve‘s interest rate path. The Institute for Supply Management’s (ISM) services index released on Jan. 7 showed that a measure of raw material and service prices surged to its highest level since early 2023, causing the Nasdaq 100 to fall 1.8%.

Wednesday's CPI report is scheduled for release at 9:30 ( UTC+8 ) . The core CPI, which excludes food and energy costs, is expected to rise 0.2% month-on-month in December, down from 0.3% in November; while the year-on-year growth rate is expected to be 3.3%, above the Fed's 2% target and the same as the readings in the previous three months.

Meanwhile, the U.S. Producer Price Index (PPI) data for December rose modestly, but this is unlikely to change the Fed's view that it will not cut interest rates again until the second half of this year due to the strong performance of the job market. The U.S. PPI annual rate in December was 3.3%, lower than the expected 3.4%, but up from the previous value of 3%, continuing to hit a new high since February 2023. PPI is a leading indicator of CPI and accounts for most of the overall CPI. Readings below expectations are often bearish for the dollar because they indicate that manufacturers are unable to pass on higher costs to consumers.

Against the backdrop of a resilient job market and solid economic growth, U.S. core inflation is likely to cool only slightly by the end of 2024, supporting the Fed's stance of slowing the pace of rate cuts. According to economists' forecasts, the core CPI, excluding food and energy, is expected to slow to 0.2% in December after rising 0.3% month-on-month for four consecutive months, while the year-on-year growth rate will be the same as the reading three months ago at 3.3%, indicating that anti-inflation progress has stagnated.

A recent blowout jobs report has economists generally believing that the Federal Reserve will cut interest rates further this year only if inflation shows signs of cooling in the coming months. As of Tuesday morning, the market is pricing in just a 3% chance of a rate cut at the Fed's January meeting, according to CME's FedWatch tool. At least until the June meeting, the market is pricing in no more than a 50% chance of a rate cut at the meeting.

Market volatility and economic data releases will continue to influence investor sentiment and the Fed's policy decisions. CPI and PPI data will provide the market with important clues about inflation and economic health, while the performance of the job market will further affect the Fed's path of interest rate cuts. Investors need to pay close attention to these key data to prepare for possible market volatility and policy changes.