Understanding how forecasts are distributed is important for the market’s reaction when actual data differs from expectations. The forecast range can significantly influence the market, especially when actual numbers surprise traders. Even if forecasts fall within a range, clustering towards one end can still lead to surprises if results align with the opposite side. For instance, consensus forecasts predict CPI year-over-year (Y/Y) at 2.5% (49% probability), while CPI month-over-month (M/M) is expected at 0.2% (65% probability).

Core CPI Expectations

Most expect Core CPI Y/Y to be around 2.9% (67%), with Core CPI M/M at 0.3% (66%). There’s a notable bias towards softer monthly expectations. The market anticipates the Federal Reserve will lower rates by 44 basis points in 2025. However, if Core CPI exceeds expectations, it could lead to only one rate cut this year. On the other hand, if CPI numbers are lower, it might strengthen expectations for two cuts, possibly even a third. This shows that market pricing is often influenced more by how forecasts cluster around a number than by the exact figures analysts provide. It’s rarely just about the expected number; it’s more about the surprise factor if actual results differ from where predictions are concentrated. When nearly half of forecasters predict a 2.5% Y/Y headline CPI, it suggests a clear consensus. However, leaning towards a low-end 0.2% for the monthly figure can shift market sentiment more noticeably. These indicate soft expectations—in both number and tone. The market reacts more strongly when softer predictions are met with stronger inflation data.

Market Implications and Pricing

For Core CPI, a Y/Y expectation of 2.9% is widely accepted. More surprisingly, over 65% of forecasts for monthly CPI are set at 0.3%. This distribution indicates participants are preparing for stable but slightly high underlying inflation, making the market sensitive to unexpected changes. In the context of US rates, many believe about 44 basis points of rate cuts will happen next year. This implies expectations of two cuts, potentially three, if inflation remains low. However, if the next Core CPI report exceeds expectations, especially above 0.3% for the monthly rate, it could quickly shift prospects towards only one cut. Anything above 0.3%—or nearing 0.4%—would challenge the comfort levels of policymakers, making it clear that current pricing may be overly optimistic. As we navigate the next two weeks, we should pay attention to how hedging skews are changing. Options pricing, particularly for shorter-term instruments, should indicate whether there’s new demand for protections against unexpected outcomes. This shift could happen quickly if some trading desks begin adjusting their risk assessments around the notion that inflation isn’t over yet. It’s crucial to observe not just the mean predictions but also how outliers behave—their pricing, hedging locations, and points of pivot. In this environment, even minor data mismatches could lead to significant repositioning. This isn’t mere speculation; it’s a matter of market structure. Short-term volatility trends may provide clues about future movements. If we see increased activity at higher strike prices for rate volatility, it suggests investors are already adjusting to inflation expectations rather than waiting for confirmation. Powell and his team haven’t ruled out further actions—they’ve just kept the door slightly ajar. Whether they take action depends on the deviations from what’s expected, and that’s where we should focus our attention. Create your live VT Markets account and start trading now.

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