Markets Are Focused on the Upcoming US CPI. What to Expect?

The US Bureau of Labor Statistics will release the Consumer Price Index (CPI) figures for November on Tuesday, December 13th. The CPI is one of the most popular measures of inflation and deflation. Accordingly, this is an important indicator for the Fed in deciding whether to raise or lower the key interest rate.

The upcoming release is very important for the markets, as it will reflect the new vector of monetary policy. And it may dramatically change the balance of power in the market between bears and bulls.

Mixed US CPI forecasts

October’s CPI data turned out to be optimistic. After all, the release showed that the consumer inflation index began to decline compared to the peak months of price increases. This laid the foundation for a possible reduction in the growth rate of the Fed's key rate. Which is expected to rise by just 50 basis points as early as Wednesday, December 14.

Investors will also be paying attention to the core US CPI which excludes the price of food and energy due to their volatility.  That metric has had a mixed trend in recent months.

But what will November’s CPI show?

At this point, the forecasts are varied. Some are predicting a decline in the November core CPI to 7.1% from 7.7% in October (YoY) and a decline in the monthly CPI to 0.3% from 0.4% in the previous period.  On the other hand, some analysts are predicting base CPI growth of a few tenths of a percent.

One way or another, market participants have several investments and trading strategy scenarios prepared for the outcome of the release.

What assets might be affected by the release?

The upcoming CPI release will traditionally affect the US Dollar, US Stocks ($DOW30, $NAS100, $SPX500) and gold ($XAU/USD).

Investors are likely to reinstate their long positions on the US Dollar if the monthly Core CPI in October arrives at 0.5% or higher. Such data would likely cause Fed policymakers to pencil down a higher-than-5% terminal rate even if they vote for a 50 basis points rate hike on Wednesday. At the same time, such a scenario increases the risks to US stocks, which react negatively to rising inflation.

On the other hand, a reading of 0.3% or lower could feed into the ‘Fed pivot’ narrative and trigger a US Dollar sell-off. However, US stocks may get support and face a bullish rally in this case.

In addition, with a soft inflation report, the price of gold could target $1,830 and $1,860 levels. After all, in such a case, investors may be discouraged by the decline in USD yields and shift their attention to a safe haven in the form of gold.

Summary

• The US Bureau of Labor Statistics will release the Consumer Price Index (CPI) figures for November on Tuesday, December 13.
• A soft inflation report could feed into the “Fed pivot” narrative.
• Gold, as well as US Dollar and Stocks are the most likely to be affected by the US CPI release.