US CPI Preview: Could the Fed Actually Hike Rates on a Hot Inflation Report?

US CPI KEY TAKEAWAYS:

• US CPI expectations: 3.8% y/y headline inflation, 2.8% y/y core inflation
• A surprising CPI report could still drive abnormal volatility in major markets given uncertainty around the FOMC’s near-term path
• The Nasdaq 100 is poised for a potential higher-volatility breakout heading into one of the most important economic data releases of the month

When is the US CPI report?

The US CPI report for June will be released at 8:30ET (12:30 GMT) on Tuesday, July 14.

What are the US CPI Report Expectations?

Traders and economists are projecting headline CPI at -0.1% m/m (3.8% y/y) and Core CPI at +0.2% m/m (2.8% y/y).

US CPI Forecast

Are we past peak inflation?

That’s the question that will be top of mind for traders heading into the June CPI report. For the first time in three months, the Strait of Hormuz was (partially) open in the latter half of June, leading to a steep decline in energy prices, while the lingering effects of President Trump’s now-invalidated “Liberation Day” tariffs had presumably already worked their way through the economic machine.

Against that backdrop, traders and economists are expecting the first negative m/m reading in headline inflation in more than a year, a development that would ease some of the concerns about an imminent FOMC interest rate hike. As the chart below shows, Fed Funds Futures markets currently pricing in a 35% chance that the central bank will raise interest rates at its meeting later this month after a relatively hawkish meeting last month under new FOMC Chairman Kevin Warsh:

Source: CME FedWatch

While my view is that the hawks are getting overly optimistic, a surprising CPI report in combination with Chairman Warsh’s first Humphrey-Hawkins testimony at 10:00 ET the same day could still drive abnormal volatility in major markets given the uncertainty.

As many readers know, the Fed technically focuses on a different measure of inflation, Core PCE, when setting its policy, but for traders, the CPI report is at least as significant because it’s released weeks earlier. As we noted above, has remained stubbornly above the Fed’s 2% target for a half-decade already, and leading indicators are suggesting it could rise further from here:

Source: TradingView, StoneX

Looking at the chart above, the “Prices” components of the PMI reports have edged lower in recent months, hinting that the gap between that indicator and the headline CPI inflation rate could continue to narrow in the coming months.

Nasdaq 100 Technical Analysis – NDX Daily Chart

Source: TradingView, StoneX

The tech-focused Nasdaq 100 could be one of the bigger movers on the back of the CPI report. From a technical perspective, the index is coiling within an increasingly tight “symmetrical triangle” pattern on the daily chart. For the uninitiated, a common analogy for this pattern is that of a spring being compressed from both the top and the bottom: it builds up potential energy and once one of those pressure points is removed, the spring (the Nasdaq 100 price) is likely to move sharply in that direction.

In other words, the market is poised for a potential higher-volatility breakout heading into one of the most important economic data releases of the month. If we see a topside breakout, in line with the underlying uptrend and rising 50-day EMA, a continuation toward (and potentially through) record highs at 30,800 could be in play later this week, whereas a bearish breakdown could expose the multi-month low at 28,250 in short order.

-- Written by Matt Weller, Global Head of Research

Check out Matt’s Daily Market Update videos on YouTube and be sure to follow Matt on Twitter: @MWellerFX