Oil Steadies, Markets Hold Breath for US Inflation Report

Stocks have edged higher as oil prices stabilize and investors await Wednesday's US inflation report, which could impact expectations for the next Federal Reserve move.

The market is currently balancing two key drivers: geopolitics through oil prices and monetary policy through inflation. Iran has signaled that a deal with Oman on transit rules in the Strait of Hormuz is close, but shipping remains limited, keeping Brent near $83.50. Energy costs can quickly spill into inflation readings, which is why this report matters.

Following a softer US jobs report, traders have scaled back bets on another Fed rate increase. Now, the spotlight is on the consumer price index (CPI) reading, with economists polled by Reuters expecting July headline inflation to cool to 3.4% year-on-year from 3.5%, and core inflation to ease to 2.5% from 2.6%. These numbers would support the idea that rates can stay on hold.

Markets are pricing in a 45% chance of a September hike, down from roughly 67% a week ago. A 3.4% CPI reading could make or break this market expectation. On CPI day, bond and stock traders will sanity-check their Fed expectations, and a match to the forecasted numbers would reinforce the recent move toward fewer hikes.

However, if core inflation comes in hotter than expected, markets may reprice quickly via fed-funds futures, pushing 'real yields' higher. This would raise the discount rate used to value future profits, potentially hitting long-duration stocks and Nasdaq futures hardest.