⏫US500 gains 0.5% ahead of CPI

Improved market sentiment allows for some recovery of losses on Wall Street ahead of the publication of key data at 12:30 pm GMT🚨💡

The US CPI inflation data for February will be the key macroeconomic report this week. While the whole world is currently focused on tariffs, economic uncertainty in the US and a potential ceasefire in Ukraine, inflation issues could have a huge impact on the Fed's monetary policy, which continues to have a big impact on the dollar. What to expect from today's CPI report?

Market expectations

• The market is quite clearly indicating that it expects inflation to fall to 2.9% y/y, after several months of recent growth
• Inflation futures indicate a reading of 2.9% (it is worth remembering, however, that they also indicated this in January)
• The underlying factors indicate that inflation should not rise unless there is a larger monthly increase than 0.5% m/m
• At the same time, however, this report will show that inflation remains at an elevated level
• A slight decline in core inflation is expected to 3.2% y/y from 3.3% y/y
• Monthly inflation will be important after the recent very strong increase. The pace of price growth is expected to slow to 0.3% m/m, after the last increase of around 0.5%
• The Fed maintains the view that in the context of achieving the inflation target, inflation cannot significantly exceed 0.2% m/m. Inflation has been growing by an average of 0.25% over the past two years, while in the last 10 years it has been growing by an average of 0.26%
• Core inflation per month is also expected to grow by 0.3%

Recent reports on surveys of entrepreneurs in the US have indicated growing price pressure, which may soon have an impact on maintaining inflation at a high level for a longer period. Source: Macrobond, XTB

It is worth remembering that previously we observed a huge jump in monthly inflation, driven by rent inflation and gas and electricity prices. Source: Bloomberg Finance LP, XTB

Theoretically, we should see a negative impact of fuel inflation in February, given the decline in oil and fuel prices. Source: Bloomberg Finance LP, XTB

Service inflation remains a mystery, as it has slowed down quite significantly recently, but the ISM price sub-index suggests that further declines may already be limited. Source: Bloomberg Finance LP, XTB

What else to look for?

• BLS increases the weight of goods over services in inflation, which could have serious consequences if tariffs on foreign products continue to be imposed
• BLS increases the share of car inflation in CPI, which could have significant consequences if prices rebound
• BLS slightly reduces the weight of rental inflation, which could support a decline in core inflation if the current trend continues
• Food prices may have a smaller impact on inflation. The growth in egg prices, which have seen significant increases in recent months, has decreased
• Further price declines are expected in the core services sector, such as hotel prices, airline tickets and car insurance

Used car prices have fallen, which should also be reflected in February inflation. Source: Bloomberg Finance LP, XTB

Rental inflation is still the largest category in terms of contribution. Case Shiller may suggest the end of the decline in this category, but at the same time, new rental prices are falling very sharply, which may outweigh the further decline in overall rental inflation. Source: Bloomberg Finance LP, XTB

How will the market react?

Today's data is unlikely to change the Fed's perception of the inflation situation. Of course, this report should be much better than January's, although at the same time it is necessary to take into account the beginning of the impact of tariffs on the inflation situation, although currently to a much limited extent. The greatest impact on inflation is expected to be visible in the second quarter of this year. If today's reading shows a decline in inflation or a greater decline in inflation than expected, there is a chance of further stimulation of Wall Street to make up for losses. Lower inflation would be a harbinger of possible future cuts, which are still uncertain. Powell indicated during his last speech that inflation remains high and the labor market is strong, which theoretically rules out the possibility of cuts at the moment. However, if inflation starts to fall faster, there is also a chance for a faster reaction from the Fed.

At the moment, 3 cuts from the Fed are priced in, with the first cut this year in June. Source: Bloomberg Finance LP, XTB

The US500 is currently losing about 5% since the beginning of this year and over 8% from its historic peak. The declines are definitely due to the Mag7 group, which has lost 15% of its value since the beginning of this year. Currently, the very important support on the US500, designated by the 161.8 retracement of the last upward impulse and the 5600 level, is being tested. At the same time, the range of the previous largest correction in the upward trend is being tested. The nearest important resistance is around 5670-5700, where there is also a 23.6 retracement of the entire last downward impulse and the 250 session average. This level is key - if it returns above it, the upward scenario will start playing out again. However, if not, a repeat of 2022 will be possible, when the 250 session average was broken for over a year. Source: xStation5