US CPI Preview: Good, bad, ugly

The upcoming Consumer Price Index (CPI) release on Wednesday is poised to be a pivotal moment for financial markets, with potential outcomes ranging from "good" to "ugly," according to Sevens Research in its latest note.

The results could significantly impact expectations for a Federal Reserve rate cut in September and influence stock market performance.

Federal Reserve Chair Jerome Powell has emphasized that favorable inflation data is crucial for a September rate cut.

According to Sevens, a "good" CPI report would feature a Core CPI below 3.4% year-over-year and a Headline CPI of 3.1% or less.

They believe such results would likely bolster the case for a rate cut, making it nearly a certainty and further driving stock market gains.

Sevens Research predicts that under these conditions, the S&P 500 would likely continue its upward trend, with growth and defensive sectors leading the way.

Additionally, they state that a favorable CPI could drive the 10-year Treasury yield below 4.20% and weaken the Dollar Index, potentially boosting commodities like gold.

Conversely, the firm says a "bad" CPI report with Core CPI at 3.4% or higher and Headline CPI between 3.2% and 3.3% would signal only a minimal decline in inflation.

They explain that this outcome might dampen the Fed’s incentive to cut rates, leading to a modest negative reaction in the stock market. Under this scenario, Sevens says Treasury yields could rise, and the Dollar Index might strengthen, causing commodities to see moderate declines.

Finally, an "ugly" CPI report, featuring Core CPI above 3.4% and Headline CPI over 3.3%, would likely lead to a sharp market selloff, according to the firm.

With inflationary pressures contradicting the current disinflationary trend, stock prices could fall by more than 1%, and Treasury yields might spike, challenging recent market gains, they add.

Sevens adds that the Dollar Index would likely surge, and even positive news elsewhere might not prevent a significant market pullback.