Market sentiment in the US remains fragile ahead of today’s CPI data for February, which is expected to be a major market-moving event. The challenge, however, lies in interpreting the impact of inflation data given the complex interplay between inflation trends, economic conditions, and Fed expectations. More importantly, the interaction is further complicated by the unpredictable shifts in US tariff policies. In the end, while traders may react initially to the numbers, they’re more likely to revert to pre-existing trends once the CPI risk is cleared.
Consensus forecast sees headline CPI dipping slightly from 3.0% to 2.9%, signaling that the uptrend from September’s low of 2.4% has finally ended. Meanwhile, core CPI is expected to ease marginally from 3.3% to 3.2%, but remains stuck in a narrow 3.2%-3.3% range since last June.
If the data confirms these expectations, it would reinforce the view that disinflation progress continued to stall. This, in turn, supports Fed’s cautious stance. Fed Chair Jerome Powell has repeatedly stressed that the central bank is in no rush to lower interest rates, and today’s inflation data is unlikely to change that narrative.
Fed fund futures are currently pricing in a 97% probability that Fed will hold rates at 4.25%-4.50% in its upcoming March 19 meeting, making it almost a certainty. However, the outlook for Q2 is much murkier. Traders are factoring in a 38% probability of a cut in May and an 85% chance of a reduction in June.
Beyond the near term, the real test will come in April when reciprocal tariffs are formalized. Given recent stock market volatility, where recession concerns have already led to deep selloffs, any additional economic stress from tariffs could further push Fed toward an aggressive easing cycle.
Some economists have already noted that the May or June rate cut could indeed start a series of swift reductions in the second half of the year, if confidence deteriorates further—especially if the labor market weakens significantly.
Technically, DOW should have completed a double top pattern (45073.63, 45054.36) after breaking through 41844.89 support. While deeper pull back is now in favor, strong support could be seen around 40k zone to contain downside, at least on first attempt.
The 40k zone represents 39889.05 resistance turned support, as well as 38.2% retracement of 32327.20 to 45054.36 at 40192.58. This development would keep price actions from 45054.36 as a correction to rise from 32327.20 only, likely a sideway pattern.
However, decisive break of 40k will argue that DOW is already in an even larger scale correction, or enter a bear market as some would describe.
ECB fully prepared to expand PEPP in June
Accounts of April 29-30 ECB monetary policy meeting indicated that it’s ready to expanding easing measures in the upcoming June meeting. The Governing Council was “fully prepared to increase the size of the PEPP and adjust its composition, and potentially its other instruments, if, in the light of information that became available before its June meeting, it judged that the scale of the stimulus was falling short of what was needed.”
The minutes also said that it’s Eurozone economy was “heading towards a decline in activity that was unprecedented in recent history.” June’s Eurosystem staff economic projections would be “revised down significantly” compared with March ECB staff projections. Present situations was also “characterised by Knightian or ‘radical’ uncertainty, implying unquantifiable risks.”
Also, it’s generally considered that, of the three coronavirus scenarios, the “mild” scenario was probably already too optimistic. But it’s “too early” to conclude that the “severe” scenario” was the “most likely. Still a “swift V-shaped recovery could probably already be ruled out at this stage.”
Full minutes here.