CPI Release Set to Influence Fed Rate Expectations Amid Shift in Market Pricing

The US economic calendar is packed with key data releases this week that could significantly influence Federal Reserve rate expectations. The Consumer Price Index (CPI) will be released on Wednesday, followed by the Producer Price Index (PPI) and jobless claims on Thursday. Two Federal Reserve presidents are scheduled to speak on Thursday, potentially offering insights into future policy directions.

Markets are particularly focused on the core CPI, as it could indicate the trajectory of inflation and spending, thereby affecting rate-hike expectations. The probability of a 3.1% or lower annual inflation rate in July has increased from 32% to 39.5%, reflecting a notable shift in market pricing.

The potential for lower inflation would be consistent with decreased rate-hike expectations, which could support growth in risk assets. Conversely, a higher-than-expected CPI reading might lead to increased treasury yields and a stronger dollar, placing pressure on stocks, gold, and cryptocurrencies.