• The March CPI report represents a make-or-break moment for the timing of rate cuts this year. 

• Inflation is expected to cool down in March following two firm CPI reports to start 2024.

• Here’s a preview of how markets could react to the March inflation data. 

All eyes are on the March consumer price index report, which represents a make-or-break moment for potential interest rate cuts this year.

The inflation report, set to be released Wednesday morning, is expected to show a continued cooling of inflation after two firm reports in January and February.

Consensus views are pointing to a year-over-year jump of 3.7% in core CPI, which would be just a tad lower than the prior month’s reading of 3.8%. Month-over-month Core CPI is expected to come in at 0.3% in March, compared to a reading of 0.4% in February.

According to Macquarie strategist Thierry Wizman, the ambiguity of different job market indicators means the CPI report is all the more important.

“It’s exactly because US labor-market indicators are so ambiguous (hiring data is strong, but hiring surveys are weak) that makes the US inflation data so much more important as a driver of the outlook for Fed policy in the next few months,” Wizman said.

And with potential interest rate cuts hanging in the balance, “tomorrow’s March CPI report will be paramount,” Wizman said.

Fed fund futures indicate the market sees about a 50-50 chance the Fed will cut interest rates in June, down from nearly 70% odds of a June cut earlier this year.

Bank of America rates strategist Meghan Swiber expects inflation measured by CPI to have cooled in March, increasing the chances that the Fed will cut interest rates at the June policy meeting.

“We expect core CPI inflation to round down to 0.2% m/m owing to a slight decline in core goods prices and less price pressure from core services,” Swiber said in a note on Tuesday. “If realized, the market will likely price greater probability of a June cut and 10y rates will have trouble breaching 4.50%.”

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JPMorgan’s trading desk emphasized the importance of the March CPI report, as it could significantly shape the narrative for stocks and bonds going forward.

“The US CPI print seems to have the greatest potential to further shape the narrative if it materially surprises higher or lower,” JPMorgan’s Andrew Tyler and Ellen Wang said in a note on Tuesday.

Here are three scenarios that could play out based on the March CPI report, according to JPMorgan.

1. In-line CPI print

In this scenario, JPMorgan expects year-to-date trends to remain in place. “i.e., equities grind higher led by large caps, though we could continue to see a further rotation towards broader cyclical / value.”

2. Very hot CPI print

In this scenario, a too-hot inflation report could spark a “mini repeat” of what happened from August to October, as inflation scares led to a sharp sell-off in stock prices.

“The lack of recession fears and strong economic growth likely limits the absolute amount of downside for equities,” JPMorgan said. “In this environment, we could see further rotation into sectors like Energy and Materials.”

3. Very cool CPI print

Stock market investors would likely be the happiest in this scenario, according to JPMorgan, as it has “potential to cause an accelerated equity move higher.”

“Areas that could outperform include Credit Laggards, Regional Banks, Renewables, and perhaps Utilities and Real Estate. In addition, if rate cut expectations are pulled forward and drive bull steepening, this could be beneficial for Cyclicals and Value. Small caps could also perform better,” JPMorgan said.

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