March CPI reading will be key for rate cut forecast

Following two strong reports in January and February, it is expected that the consumer price index report for March will demonstrate a sustained slowdown in inflation. The core CPI is expected to increase by 3.4% year over year, according to consensus estimates. This would be somewhat less than the 3.8% increase from the previous month. The Core CPI is predicted to increase month over month in March, coming in at 0.3% from a figure of 0.4% in February.

The US inflation data is particularly significant in determining the direction of Fed policy in the upcoming months due to the uncertainty surrounding various job market indicators. The March CPI data that is released tomorrow will be crucial since interest rate reductions are still a possibility.

According to Fed fund futures, the market now believes there is a 50/50 probability the Fed will lower interest rates in June, compared to earlier this year when there were roughly 70% odds. The probability that the Fed would lower interest rates at its June policy meeting is increased by the expectation that the CPI-measured inflation declined in March.

The March CPI report is important because it has the potential to drastically alter the storyline for equities and bonds in the future. The following three outcomes are based on the March CPI report:

1. In-line CPI print: The current year’s patterns are still in effect, with large caps driving higher equity prices.

2. Extremely hot CPI print: An excessively hot inflation report could cause a “mini repeat” of the August–October period, when stock prices sharply fell due to inflation fears.

3. Very cool CPI print: Given the possibility of an accelerated equity advance upward, stock market investors would probably be the happy in this scenario.