Despite Federal Reserve Chairman Powell's testimony during his two-day visit to Capitol Hill this week showing a more dovish side, and the S&P 500 index closing at a new all-time high for the 37th time this year, leading U.S. stock investors to 'keep dancing to the music,' many cross-asset investors may feel it's not quite satisfying enough: at least the bond, currency, and commodity markets haven't made much noise in the past few days...

And this has caused many Wall Street traders to shift their focus in advance to the U.S. June CPI data that will be released tonight at 20:30—Will this CPI data completely ignite expectations for a Fed rate cut? And will the rising trend of global risk assets get another boost tonight?

Without further ado, let us tell you through a preview of the essential U.S. CPI data:

What are the market expectations for tonight's CPI data?

According to the median of surveys by the media of institutional economists, for the four key sets of month-over-month and year-over-year indicators in the U.S. June CPI data tonight, the core indicators are expected to maintain the same rate of increase as last month, while the overall indicators may see one increase and one decrease compared to last month. The detailed forecasts are as follows:

Note: The blue line represents the annual CPI rate, and the black line represents the core CPI annual rate.

The U.S. June CPI annual rate is expected to increase by 3.1% year-over-year, with the previous value being 3.3%.

The U.S. June CPI monthly rate is expected to increase by 0.1% month-over-month, with the previous value being 0%.

The U.S. June core CPI annual rate is expected to increase by 3.4% year-over-year, with the previous value being 3.4%.

The U.S. June core CPI monthly rate is expected to increase by 0.2% month-over-month, with the previous value being 0.2%.

The following chart is a detailed compilation by the famous reporter Nick Timiraos, known as the 'New Fed Wire Service,' of the various Wall Street banks' estimated numbers.

Although the actual performance of the above four sets of indicators compared to expectations may affect the market direction tonight, if one must pick the most critical set, the month-over-month performance of the core CPI is likely the most watched by most market participants. The U.S. core CPI month-over-month indicator has already come in below market expectations twice in a row; will it happen a third time tonight?

In fact, in terms of the month-over-month core CPI indicator, the range of estimates from Wall Street institutions is actually quite narrow—all the compiled forecasts fall between 0.1% and 0.3%. And this 0.1 percentage point difference could very well determine the market direction tonight.

Which prices are expected to fall in June, and which will remain firm?

Let's look at the details of the data. The reason for the significant gap between core CPI inflation and overall inflation in the U.S. in May was a 2.0% drop in energy prices. By contrast, the decline in energy prices in June was limited, so a similar large gap is unlikely to be seen again. So, what are the potential highlights of the June inflation report to watch out for?

Let's look at Goldman Sachs' forecast. Overall, Goldman Sachs' predictions for the four main indicators mentioned above are consistent with the current mainstream market forecasts (which we will not elaborate on here). Of course, Goldman Sachs also highlighted the expected trends in three key components of core inflation that we expect to see in this month's report.

Firstly, used car prices are expected to fall by 1.6% month-over-month, reflecting the continued decline in auction prices. U.S. used car auction prices have fallen 28% from their peak, while CPI data for used car prices have only fallen 16%, suggesting there is further room for decline in this report's CPI figures. At the same time, new car prices are expected to rebound—rising by about 0.2% (May was -0.5%) to reflect the impact of dealership software system interruptions and reduced promotional discounts during the month.

Secondly, Goldman Sachs believes that car insurance prices are expected to rise again in June, but not as quickly as at the beginning of the year—the bank forecasts a 0.5% increase in the auto insurance component, compared to an average increase of 1.3% so far in 2024. Goldman Sachs believes that rising car prices, higher repair costs, and increased medical and litigation costs have put pressure on insurance companies to raise prices, but the pass-through of premiums to consumers has been delayed for a long time, partly because insurance companies must negotiate price increases with state regulators.

Thirdly, Goldman Sachs expects housing inflation to slow down from the previous month due to the narrowing gap between new leases and renewal lease rents—projecting a 0.36% increase in rent and a 0.39% rise in Owners' Equivalent Rent (OER). Goldman Sachs also stated that rent growth for single-family homes will be slightly stronger in the future, which may lead to OER increases continuing to outpace rent in the CPI composition. By December 2024, Goldman Sachs forecasts that the overall housing inflation rate will operate at a monthly climb of about 0.34% (reflecting a rent inflation rate of 0.26% and OER at 0.37%).

What is the market situation at the time of CPI data release?

Before the release of tonight's CPI data, both the U.S. stock and bond markets can be said to be in a relatively strong position, welcoming the arrival of this key economic indicator. After the testimony speech by Federal Reserve Chairman Powell earlier this week, expectations for a rate cut in September by the Fed have further heated up.

On Wednesday, all three major U.S. stock indices rose by more than 1%. The S&P 500 index broke through 5600 points for the first time in history and also set the 37th record closing high of the year.

Note: The number of new highs for the S&P 500 each year over the past 95 years

Looking at the pricing in the interest rate futures market, according to the FedWatch tool by the Chicago Mercantile Exchange (CME), the probability of the Fed cutting rates by 25 basis points in September has risen overnight from about 70% on Tuesday to 73.3%. Before the end of the year, the Fed is also expected to make its second rate cut of the year.

Of course, whether the window for the first cut in September can really be locked in is still very crucial to tonight's data, so today's market volatility is likely to be significant. As shown in the chart below, since the beginning of this year, the average volatility of U.S. stocks on the day CPI is announced has been as high as 0.9%, nearly twice the average volatility of the S&P 500 index up to last Friday (0.5%).

The options market has actually been well prepared for tonight's big market moves. The volatility curve for the S&P 500 index shows that the ultra-short-term volatility (covering tonight's CPI data) has approached a rare 16!

How will tonight's data ultimately affect market performance?

We have previously introduced that Andrew Tyler, head of U.S. market intelligence at J.P. Morgan, had simulated four possible scenarios for the U.S. stock market following tonight's CPI data, as follows:

① If the month-over-month increase in U.S. core CPI for June exceeds 0.3%, it means that U.S. inflation is making a comeback, weakening the possibility of a Fed rate cut, which could trigger a sell-off in risk assets, with the S&P 500 index falling 1.25% to 2.5%—but he believes there is only a 2.5% chance of this happening.

② If the month-over-month increase in U.S. core CPI is between 0.15% and 0.20%—which is also the scenario Tyler's team believes is most likely. In this scenario, the S&P 500 index is expected to rise by 0.5% to 1%.

③ If the month-over-month increase in U.S. core CPI is between 0.20% and 0.25%, U.S. stocks may initially react negatively, but a decline in bond yields will ultimately support the stock market, pushing the S&P 500 index to eventually rise by 0.25% to 0.75%.

④ The most optimistic scenario is that the month-over-month increase in U.S. core CPI for June is below 0.1%, which would be extremely positive for U.S. stocks and might even prompt some to call for an early rate cut in July, potentially driving the S&P 500 index up by 1% to 1.75%.

Goldman Sachs also has its own scenario predictions, which investors can refer to alongside J.P. Morgan's forecasts.

Note: The left side shows the month-over-month core CPI data, and the right side shows the change in the S&P 500.

Of course, the above predictions are ultimately just the opinion of one Wall Street institution, and there are many factors that affect the market, with market changes often being unpredictable and complex, so investors should not blindly believe in them.

Editor/new