Pivotal CPI Data to Determine If Fed Rate Cut Bets Will Be Vindicated

The Stakes Couldn't Be Higher

The stakes couldn't be higher for Wednesday's July consumer price index (CPI) report. With growing signs of disinflation, Wall Street has never been more confident the Federal Reserve will start cutting interest rates as soon as this month. However, the all-important CPI reading will likely be the clincher that determines if those lofty rate cut bets will be vindicated.

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Mounting Evidence of Retreating Inflation

Signs of retreating inflation are mounting. Tuesday's producer price data showed just 0.1% monthly growth, lower than expected and taking the annual rate down to 2.2% - nearly meeting the Fed's 2% target. This added to hopes that July's CPI will confirm the continued cooling trajectory when it is released in just an hour.

Markets Pricing in Aggressive Rate Cuts

The improving inflation backdrop has investors positioning for an imminent policy pivot by the Fed. Markets are now pricing in absolute certainty of at least a 25 basis point rate cut at the September meeting, with traders leaning heavily toward a more aggressive 50 basis point move. Some economists argue the case for starting with a 50 bp cut is strong, given declining prices and rising unemployment that could soon demand easier policy.

Make-or-Break CPI Data Looms

A positive CPI print would likely solidify those aggressive rate cut wagers and spark further rallies in equities, especially in battered sectors like technology. However, an upside inflation surprise could swiftly unwind those dovish bets. The make-or-break CPI data looms large over markets gearing up for a critical shift in Fed thinking.

High Stakes Ahead of CPI Release

For investors, the stakes are high headed into the CPI release. Consensus expects a 0.2% monthly rise in both headline and core CPI. Anything materially higher could prompt traders to rethink lofty easing bets, likely catalyzing volatility across asset classes. Conversely, continued disinflationary trends could vindicate the most aggressive Fed pivot forecasts.

All Eyes on Crucial 8:30am Update

The tepid producer prices and recovering consumer sentiment add weight to "imminent rate cut" calls. But all eyes are locked on the Bureau of Labor Statistic's 8:30am EST CPI update, which could change everything for markets feverishly speculating on when and how aggressively the Fed downshifts its inflation fight.

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