The latest rebound in the financial markets has lost steam following Federal Reserve Chair Jerome Powell’s recent statement that the fight against inflation is far from over. Powell also highlighted that interest rates could climb more than what the markets anticipate if inflation does not ease, thereby reversing some of the earlier market optimism that the rate hikes would soon slow down.
Investors would be closely monitoring the Consumer Price Index (CPI) numbers on Tuesday as well as the retail sales data due on Wednesday. The CPI reading will help investors better understand how the Federal Reserve will proceed with its monetary policy in its fight against inflation.
The calendar is light this week and traders appear to be in a cautious mood before the U.S. CPI for January is released. Philadelphia Federal Reserve President Patrick Harker has pushed back against speculation about a Fed rate cut during 2023, but he did mention that the Fed is unlikely to cut rates this year but may do so in 2024 if inflation begins to subside.
The majority of Fed governors, including U.S. President Joe Biden and Treasury Secretary Janet Yellen, have ruled out U.S. recession concerns. The receding fears for potential economic slowdown favoured the recent optimism in the market, even though U.S. Treasury bond yields has been flagging recession woes.
Tuesday’s CPI report is forecast to show further deceleration in annual price growth to 6.2% in January. The core CPI, which strips out volatile food and energy components which is perceived as a better underlying indicator than the headline measure, is expected to rise 0.4% on a monthly basis and 5.5% on a yearly basis.
Overall, recent data suggests that inflation has most probably peaked in 2022 and is now decelerating, but that does not mean that every consecutive month would show a decline.
While investors should not worry if there is an uptick in CPI data on Tuesday, which is likely to turn out to be temporary, nonetheless, the market is likely to experience a selloff in the short-term.
