Tonight's CPI, double inflation? How will the US stock market perform?

Overnight, the US stock market experienced a temporary plunge, but the Nasdaq closed up by 0.32%, with inflation and interest rate cuts becoming the focus of attention.

Regarding the upcoming CPI release:

1. The inflation report is set to be released on Wednesday morning at 8:30 am Eastern Time. According to Bloomberg data, the market expects an overall inflation rate of 3.4%, slightly faster than the 3.2% year-on-year increase in February. The rise in natural gas prices is a major driving factor.

Looking at the data, the possibility of secondary inflation is high. The major investment banks' expectations for US March CPI inflation are as follows:

1. Excluding volatile food and energy costs, prices in March are expected to rise by 3.7% compared to last year, slightly slower than the 3.8% year-on-year growth in February. Consumer prices are expected to increase by 0.3% month-on-month, lower than the 0.4% increase in February.

2. Core prices are expected to increase by 0.3% month-on-month in March, compared to a 0.4% increase in the previous month. Core inflation remains high, mainly due to rising costs of core services such as housing, insurance, and healthcare.

3. However, market expectations are for a slight decrease in core goods prices, mainly due to declines in new and used car prices. Economists generally expect further improvement in core inflation for the whole year.

Regarding monetary policy:

1. Federal Reserve officials see the path to lowering the target rate to 2% as "bumpy."

2. The Federal Reserve's preferred inflation gauge, the core Personal Consumption Expenditures Price Index (PCE), has cooled slightly recently.

3. Strong labor reports and stable wage growth have reduced expectations for interest rate cuts.

4. Investors expect only two and a half rate cuts this year, lower than the initial expectation of six rate cuts at the beginning of the year and three rate cuts last month.

5. The market sees a 56% chance that the Federal Reserve will start cutting rates at the June meeting, down from 62% a week ago.

Goldman Sachs: Rate cuts are optional, not mandatory

US economic data continues to show resilience, with non-farm payrolls significantly exceeding expectations. In the past 12 months, there have been 9 instances of surpassing expectations. The labor market has roughly rebalanced, with a significant contribution from immigrants. Additionally, Goldman Sachs' GDP forecast is much higher than the market's. Therefore, there are currently few signs indicating the necessity of rate cuts.

Of course, the slightly below 4% forward rate in the US is not cheap, especially against the backdrop of the end of the election. Therefore, the market still expects a 68 basis point rate cut this year and 75 basis points by 2025.

Reasons for the high and sustained inflation in the United States: Reason 1 - Economic dominance

The US economy stands out, driving global economic growth through consumer spending, while the contributions to the world economy from the consumption of the EU, Germany, the UK, Canada, Japan, etc., are relatively small:

Reasons for the high and sustained inflation in the United States: Reason 2 - The US engaging in disguised quantitative easing

The invisible quantitative easing by the US Treasury outweighs Powell's quantitative tightening.

In the past 18 months, the liquidity released through the Treasury General Account (TGA) and the Fed's reverse repurchase operations exceeded the scale of the Fed's balance sheet contraction by $417 billion.

Additionally, in the past 12 months, the US Treasury has issued $21 trillion in short-term Treasury bills.

How did US stocks and bonds perform historically after the Fed paused rate hikes? What is different this time?

If July last year was the last rate hike of this cycle, the performance of the S&P 500 so far is similar to historical performance, while the 10-year US Treasury bond performance is the worst in recent history.

The "last hike" in the graph refers to the performance of US stocks and bonds after the last rate hike. The red line represents the current cycle.