Inside Markets — De-Risking into CPI

In our opinion, the catalyst for the momentum factor unwind over the last two weeks is de-risking into CPI and earnings season and not a reaction to trade policy. The risk/reward for tomorrow’s CPI print seems skewed to the upside as the market will need to wait at least another month for the worst tariff-related price increases.  If tariff rates are deemed to be unsettled, it’s reasonable that corporations would initially absorb the impact of tariffs to avoid losing market share and hope they don’t stick.  Once the dust settles of trade policy, it’s likely that the corporate response will shift with more firms deciding to pass the costs through to the end consumer.  If August 1 is the absolute deadline, the greatest price impact would likely be felt in August and September CPI. While CPI is widely followed, core PCE is the Fed’s preferred inflation measure.  We see core PCE trending from +2.7% today to +3.3% by year-end.  If that’s the trajectory in the August data markets will begin to more fully price September (now ~60% probability) and December (now ~73%) rate cuts.

There is a total of 95bp worth of rate cuts currently priced into the 12-month forward OIS curve.  Taking the Fed funds rate from 4.33% currently to 3.38% by July ’26 should result in multiple expansion, while earnings growth gets repriced higher.