On February 12, according to the Financial Associated Press (Editor: Xiaoxiang), while not every monthly inflation report is equally important, given that the USA government has just undergone a change and may face increasingly severe inflation pressures, the January CPI report released tonight by the USA Bureau of Labor Statistics will undoubtedly bring greater impact...

Well-known journalist Nick Timiraos, often referred to as the "new Federal Reserve news agency," published a rare "high-energy alert" column this week titled "Why This Week's January Inflation Report Is Especially Important?" regarding the inflation report to be released tonight at 9:30 PM Beijing time. Meanwhile, the Financial Associated Press has reported extensively over the past two days on the rising inflation expectations in the USA and the growing fears of inflation on Wall Street.

So, aside from being the first CPI report during Trump's administration, what special significance does tonight's CPI data hold that warrants investors' focus?

Let’s first see what Timiraos, as the mouthpiece of the Federal Reserve, has to say...

In fact, it is rare for Timiraos to write specifically about individual data before similar CPI reports are released. However, he mentioned a phenomenon in his latest article, which is that the CPI increase in January has been particularly strong in recent years—especially in the three years since the pandemic in 2021.

This reflects that the price reset at the turn of the year has always been significant. Therefore, the January inflation report to be released this week may better reflect whether the Federal Reserve's anti-inflation actions have cleared this critical barrier.

Timiraos mentioned that American businesses typically consider the rising costs of food, Energy, and labor at the beginning of the year to adjust the prices of related goods—for example, restaurants may raise menu prices at this time, gyms may increase membership fees, and ridesharing services may raise their fares.

He cited the opinion of Omair Sharif, the founder of the research company Inflation Insights, stating that if companies want to raise prices, the beginning of the year is a logical time. Since companies have more pricing power during strong economic times, they have not shied away from making significant price increases at the start of the year because "consumers indicate intolerance to further price increases."

Expectations for tonight's CPI data in the industry.

So, what are the current expectations of industry insiders for tonight's CPI data?

According to the median estimate from industry media, it is expected that tonight's US January CPI will rise by 2.9% year-on-year, remaining stable from the previous month; month-on-month, it is expected to rise by 0.3%, lower than the previous value of 0.4%.

The year-on-year increase of the core CPI for January, excluding energy and food prices, is expected to drop from 3.2% to 3.1%, but the month-on-month increase may rise from 0.2% to 0.3%.

Overall, in a media survey of institutions, respondents' expectations for the year-on-year increase in CPI have a wide range—from 2.5% to 3.1%; the forecast for the year-on-year increase in core CPI is distributed between 2.9% and 3.3%. Considering the volatility of energy prices, the overall performance of CPI is obviously more difficult to predict, and the possibility of the CPI year-on-year increase returning to the “3 era” cannot be ruled out.

Regarding major investment banks, Goldman Sachs' forecast is currently slightly higher than the overall median expectation of institutions. Goldman Sachs expects the core CPI in January to grow by 0.34% (while the market expects 0.3%), increasing by 3.19% compared to the same period last year (while the market expects 3.1%). The bank also forecasts that the overall CPI in January will grow by 0.36% (while the market expects 0.3%), reflecting a 0.4% increase in food prices and a 0.6% increase in energy prices.

Goldman Sachs emphasized the trends expected in three key components of this month’s report:

① Auto Prices. Following a 1.2% increase in December last year, the bank expects used car prices to rise faster by 1.5% in January, reflecting the rise in used car auction prices. New car prices will increase by 0.5%, as the dealer promotional discounts in January led to a month-on-month decline of 12%.

② Auto Insurance. Goldman Sachs anticipates that car insurance prices will accelerate to +0.75% in January (up from +0.40% in December), reflecting the premium increases observed in the bank's online data set. Rising auto prices, repair costs, and medical and litigation expenses are pressuring insurance companies to raise rates, but the increase in premiums is passed on to consumers, which requires a long lag due to insurance companies needing to negotiate rate hikes with state regulators.

③ Communications Prices. Goldman Sachs predicts that seasonal distortions and rising postage prices will drive the communications category, leading to a rebound against its usual downward price trend (Goldman Sachs forecasts a 0.5% increase in January, whereas December remained flat, and November saw a decline of 1.0%). However, the existing seasonal distortions in this category may be alleviated by the annual revisions of seasonal factors released this week.

How will the financial markets react?

For the Federal Reserve, the inflation risks currently faced remain evidently significant, particularly against the backdrop of Trump repeatedly escalating tariff threats.

A year ago, inflation in the USA seemed to be rapidly advancing toward the Fed's target, but this momentum actually encountered significant obstacles in the first quarter of that year. Officials experienced similar unexpected inflation scenarios at the beginning of 2023, when changes to seasonally adjusted factors erased previous progress.

Dallas Federal Reserve President Lorie Logan recently stated, "We don't know if such shocks will occur in 2025. However, if inflation rises, it will signal that there is still more work to be done with monetary policy."

Recently, Fed officials have hinted that they are not eager to continue cutting rates until they are more confident that inflation will reach target levels. Fed Chair Powell reiterated this point during an overnight Senate hearing.

Currently, according to JPMorgan data, the pricing of S&P's straddle Options indicates that this CPI release day on Wednesday $S&P 500 Index (.SPX.US)$is expected to fluctuate significantly by 1.3%, marking one of the highest implied volatilities before CPI data is released since the regional banking turmoil in 2023.

A survey by 22V Research shows that 41% of respondents expect the market's reaction to tonight's CPI will be "risk-averse," 31% believe it will be "risk-on," and another 28% indicate "mixed/negligible."

Regarding the performance of US Stocks tonight, JPMorgan listed the potential volatility of the S&P 500 Index under different core CPI month-on-month growth rates.

① Core CPI at 0.40% or higher: The probability of this scenario is 5%, and the S&P 500 Index is expected to drop by 1.5% to 2%.

The first tail result might be due to soaring housing prices, along with certain segments of core Commodities shifting from decline to increase (housing, Medical, and alcoholic beverages). The bond market is expected to react sharply, as its viewpoint will shift to the idea that the Federal Reserve's current interest rates are still not restrictive, and the most likely next action from the Federal Reserve is an interest rate hike rather than a cut. In this scenario, changes in bond yields will strengthen the dollar, further applying pressure on the stock market.

② Core CPI between 0.33% and 0.39%: The probability of this scenario is 25%, and the S&P 500 Index is expected to drop by 0.75% to 1.5%.

This inflation outcome might be more driven by Commodity heat rather than service heat; the bond market's reaction is expected to be relatively subdued, and the stock market's response will be similar. This data is unlikely to completely eliminate all rate cut expectations for FY2025 but may push the implied probability of rate cuts for this fiscal year towards a 50-50 split. As of last Friday, the bond market had priced in a rate cut of 37.5 basis points.

③ Core CPI between 0.27% - 0.33%: The probability of this scenario is 40%, and the S&P 500 Index is expected to drop by 0.25% to rise by 1.5%.

The most likely benchmark scenario tonight is as follows: data shows moderate month-on-month growth, consistent with the trend since September - that is, inflation is at an inflection point, with an upward trend in inflation as economic growth/recruitment improves, although the growth rate may slow down. It is expected that Bond yields will continue to fluctuate within the Range, while the stock market will welcome a Bullish sentiment.

④ Core CPI is between 0.21% - 0.27%: the probability of this scenario is 25%, and the S&P 500 Index will rise by 1% - 1.5%.

This is a Gold scenario, especially if we combine it with stronger retail sales data later this week. The market will fully price in two interest rate cuts this year, and the stock market will respond positively, driven by mid-cap stocks.

⑤ Core CPI at 0.20% or lower: the probability of this scenario is 5%, and the S&P 500 Index will rise by 1.25% - 1.75%.

This is another tail result that may be due to core Commodities reverting to a net deflation state, leading to a decline in housing prices. In this case, the Bonds yields will turn Bullish, resulting in$Russell 2000 Index (.RUT.US)$The performance significantly outperforms the S&P 500 Index. The dollar may react negatively, which would benefit Emerging Markets Stocks.

In addition to JPMorgan, as shown in the figure below, Goldman Sachs has also made specific estimates on the impact of different CPI performances on the market tonight, which investors can refer to at their discretion.

Editor/Rocky