CPI takes over from Non-Farm! Tonight at 21:30, Wall Street will once again face the "heartbeat moment"

Caixin News, February 13 (Editor: Xiaoxiang) After experiencing the hot Non-Farm Payrolls data dampening expectations for rate cuts and the market turbulence caused by AI fears, Wall Street will tonight face the final major event of the week—also the last in the Year of the Snake according to the Chinese lunar calendar—when the U.S. Department of Labor releases the January CPI data at 9:30 p.m. Beijing time.

Similar to the Non-Farm Payrolls report, the recent two-day partial government shutdown also delayed the release of the January CPI report by a few days, but it is not expected to have a substantial impact on the data collection process. Following the particularly strong January Non-Farm Payrolls data released midweek, Wall Street is now clearly holding its breath, awaiting this key inflation data that could influence the Federal Reserve’s interest rate path for the year.

Currently, according to consensus forecasts from industry institutions regarding the January CPI data, tonight’s CPI—especially the core CPI—may roughly show a “month-over-month increase higher than the previous month,” while “year-over-year data may be lower than the previous month.”

Among them, the U.S. January CPI is expected to rise 2.5% year-over-year, lower than the 2.7% in the previous month; month-over-month, it is expected to increase 0.3%, unchanged from the previous reading.

Excluding energy and food prices, the core CPI for January is likely to decrease from 2.6% in December to 2.5% YoY. The core month-over-month increase is expected to rise from 0.2% to 0.3%.

If this institutional forecast proves accurate, the U.S. January CPI YoY increase could fall back to May 2025—the lowest level since one month after President Trump implemented the “Day of Liberation” tariffs.

It is also noteworthy that U.S. CPI data has recently been below Wall Street consensus expectations for three consecutive months. Therefore, if the January figures remain moderate relative to expectations, it could boost the Fed’s confidence—making policymakers believe they can cut rates without risking a resurgence of inflation.

Tom Lee, Head of Research at Fundstrat Global Advisors, stated that bringing U.S. inflation back to 2.5% would align with pre-pandemic price levels and the average from 2017-2019.

“Even if these results are still affected by tariffs, they would still constitute a ‘normal’ inflation environment,” Lee wrote in a report. He added that the current federal funds rate target range of 3.5%-3.75% is well above pre-pandemic levels, implying “the Fed has significant room to cut rates.”

What risks are associated with tonight’s CPI data?

Of course, while a decline in YoY CPI for January could be positive news, many Wall Street professionals are still preparing for potential surprises.

In fact, recent January inflation data has often been relatively strong. Last year, CPI growth in January exceeded that of any other month. The same was true in 2023. If this pattern repeats, it could be seen as evidence that companies are passing on Trump-era tariffs to consumers. Some Fed officials have cited this possibility as a reason to remain cautious about further rate cuts.

Additionally, the higher-than-expected January data could be related to statistical challenges—the process of compiling January data is often particularly difficult.

Early in the year, companies tend to raise prices: gyms increase membership fees, streaming services hike subscription prices, or retailers eliminate holiday discounts. The Bureau of Labor Statistics (BLS), responsible for compiling CPI, applies seasonal adjustments to remove recurring patterns. In other words, if prices tend to rise more in January, the seasonally adjusted CPI may not reflect this trend.

However, many economists believe that the BLS has not fully eliminated seasonal effects—January CPI data often still shows “residual seasonality.” A study released last week by the Boston Fed found that since 1985, seasonally adjusted January inflation has been 0.03 percentage points higher than in other months. Given that even a 0.1 percentage point monthly change can be significant for markets, this is not a small figure.

JPMorgan Chief Economist Michael Feroli predicted that, based on his forecast, the January CPI month-over-month increase could be 0.3% (more precisely 0.35%), driven by early-year price pressures that push CPI higher than December. Previous reports appeared suppressed by the residual effects of the October and November government shutdowns. Additionally, Feroli has identified signals from recent CPI data indicating notable residual seasonality. Therefore, he expects a significant month-over-month strengthening in January CPI.

Of course, due to base effects, Feroli expects the YoY CPI to decline from 2.7% in December to 2.5% in January. Considering that additional tariffs’ costs will be passed on to consumers this year and that the trade-weighted dollar has been weakening over the past year, JPMorgan continues to forecast a re-acceleration of inflation at some point this year.

Breaking down the components, JPMorgan’s forecast indicates that, based on current trading data, energy prices are expected to decline slightly in January. Although temperatures were above average early in the month, a winter snowstorm at month’s end swept across much of the U.S., causing a sharp drop in temperatures. However, declines in gasoline and fuel oil prices were largely offset by surges in electricity and residential natural gas prices. Meanwhile, food prices are expected to remain modestly firm, though their growth rate will slow compared to December’s strong increase.

Excluding food and energy, JPMorgan projects core CPI will rise by 0.4% in January (more precisely 0.39%). Residual seasonality may push prices higher—particularly in services—compared to December. Historically, weak December readings have often been followed by strong January data. If JPMorgan’s forecast materializes, the core CPI YoY inflation rate would stabilize at 2.6%.

Regarding other details in the January report, housing-related prices are expected to remain resilient, with owner’s equivalent rent (OER) and residential rent staying close to December levels, slightly below last year’s figures. While these rental inflation indicators are expected to cool over time, it will be a gradual process.

Additionally, after a sharp rise in hotel accommodation prices in December, a moderation is expected in January, though still elevated (+0.6%). Another volatile component related to travel is airfares—industry data suggest a month-over-month increase of about 2% in January, following a significant jump in December, implying last month’s public transportation prices rose by approximately 1.6%. Medical services prices may also remain firm, supporting overall healthcare costs to grow at a similar pace as December (+0.4%).

How might financial markets react tonight?

As the last test for U.S. stocks in the Year of the Snake, options straddle pricing indicates that market volatility could reach 1.1% tonight.

Christopher Hodge, Chief Economist at Natixis Bank in France, said that the Fed is currently in a phase where it must accept “a slow decline in inflation rather than a rapid return to the 2% target,” and that the Fed’s confidence in quickly lowering inflation is relatively limited.

Of course, if tonight’s inflation data roughly meets or falls below expectations, it could still bring a timely boost to the stock market—renewing investor confidence in multiple rate cuts by the Fed this year.

Earlier, a strong employment report on Wednesday showed that U.S. non-farm payrolls increased by 130,000 in January—almost double expectations—initially causing a sell-off in stocks due to concerns that a resilient labor market might hinder rate cuts by the Fed.

JPMorgan analysts currently expect that hawkish economic data tonight is more likely than dovish, but they believe the market will not react strongly as it did to stagflation signals—for example, selling off cyclical stocks and essential consumer goods, and reallocating funds heavily into long-term growth, large-cap tech, and healthcare sectors.

JPMorgan also listed potential market reactions under different data scenarios tonight, as follows:

① January core CPI MoM above 0.45%. Probability: 5.0%; S&P 500 down 1.25%-2.5%.

② January core CPI MoM between 0.40% and 0.45%. Probability: 25.0%; S&P 500 down 0.75% to up 0.25%.

③ January core CPI MoM between 0.35% and 0.40%. Probability: 42.5%; S&P 500 up 0.25%-0.75%.

④ January core CPI MoM between 0.30% and 0.35%. Probability: 22.5%; S&P 500 up 1%-1.5%.

⑤ January core CPI MoM below 0.30%. Probability: 5.0%; S&P 500 up 1.25%-1.75%.