The anticipation surrounding the release of the November Consumer Price Index (CPI) data from the United States is palpable, particularly as it approaches its scheduled publication time of 9:30 PM Beijing timeDubbed metaphorically as "the last heavyweight economic indicator of 2024," the CPI figures carry substantial weight in the financial markets, especially in the context of the Federal Reserve's monetary policy meetingsDespite the impending release of another critical inflation indicator, the Personal Consumption Expenditures (PCE) index, often the CPI takes precedence due to its timeliness and direct correlation with consumer behavior.

As investors and analysts prepare for the data, it's interesting to note the parallels with the market's behavior observed before last week's non-farm payroll reportOn Tuesday, both the stock and bond markets exhibited a pattern of subdued trading activity in the lead-up to this pivotal economic data release

Bond traders appeared to be pulling back from their positions, opting instead for a more neutral stance ahead of the CPI resultsSimultaneously, the three major U.Sstock indices were all in decline, with the Dow Jones Industrial Average experiencing a consecutive four-day decline, a reflection of the market’s cautious sentiment.

A recent weekly survey conducted by JPMorgan Chase revealed a notable shift in sentiment among its clients concerning U.STreasury bondsAfter three weeks of price increases in government bonds, the previously bullish sentiment had turned neutralThis shift highlights a growing caution among investors, anticipating potential shifts in the monetary policy landscape based on the upcoming CPI data.

Despite market expectations indicating over an 80% probability that the Federal Reserve will reduce interest rates by 25 basis points this month, lingering questions about the resilience of the U.S

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economy and inflation have kept the door open for speculation about prolonged rate hikesMany industry experts project that the Fed may have limited room for further rate cuts in 2024, suggesting a possible decrease of less than 50 basis points, a stark contrast to the Fed’s median forecast of a 100 basis points reduction laid out in the interest rate dot plot from September.

Alongside this, the federal funds futures market, which closely tracks Fed expectations, shows a diminishing inclination to bet on rate cuts in the upcoming monthsData on open contracts for January and February futures indicates a reduction, implying that investors might be unwinding their long positions in anticipation of a less favorable outlook as more information becomes available.

As trading neared its close in New York, yields for U.STreasuries across various maturities were predominantly on the rise, reinforcing the inverse relationship between yields and bond prices

Notable increases included a 2 basis point rise for the 2-year yield, bringing it to 4.153%, a 2.9 basis point uptick for the 5-year yield (4.104%), a 3.1 basis point rise for the 10-year yield (4.231%), and a 3.9 basis point increase for the 30-year yield (4.424%).

The pressure on the U.Sstock market was evident on Tuesday, as many investors opted for a wait-and-see approach ahead of the critical CPI releaseThe Dow closed down 154.10 points, a decline of 0.35% to settle at 44,247.83; the NASDAQ fell by 49.45 points or 0.25% to close at 19,687.24; and the S&P 500 saw a decrease of 17.94 points, down 0.30% to end at 6,034.91. Among the 11 major sectors of the S&P 500, only three managed to finish in the green.

Michael Brown, a senior research strategist at Pepperstone Group, noted, "Today's market is relatively calm, with participants focusing on the crucial U.SCPI report due on Wednesday

Given the robust earnings growth, steady economic performance, and the 'Fed safety net' sentiment, I still believe in buying during market pullbacks."

In a similar vein, Jose Torres, a senior economist at Interactive Brokers, pointed out that "animal spirits have been given some breathing room ahead of the CPI announcementThe U.Sstock market has stalled near historic highs, with investors awaiting the year's final CPI report, which is expected to reflect a renewed rise in year-over-year tail data." The anticipation surrounding this data is indicative of the broader uncertainties plaguing market participants.

A report released by Bank of America on Monday highlighted a slight easing of inflation concerns in the market, yet underscored the significant implications of the upcoming November CPI data for the stock marketThe bank's strategists argue that the two remaining major events of the year (the CPI and the Federal Open Market Committee [FOMC] meeting) will decisively influence the short-term market direction.

The question on many minds now is whether the CPI data could potentially surprise to the upside? This Wednesday's CPI will undoubtedly serve as the last observation for Federal Reserve officials before their meeting next week

Any signs of stagnation in the progression of declining inflation may undermine the likelihood of a rate cut.

Current median forecasts from economists surveyed by the media indicate that year-over-year CPI growth for November may rise to 2.7%, a slight increase from October's 2.6%. The month-over-month CPI rate might also see a rise from 0.2% to 0.3%. Excluding the volatile categories of energy and food, core CPI is expected to increase by 3.3% year-over-year and by 0.3% month-over-month, remaining consistent with the previous month.

Investment analyst Bret Kenwell of eToro considers the year-over-year core CPI data a crucial metric, as it has consistently held at 3.3% for the past two monthsThe current expectations mirror this figureA reading in line with or below expectations could reinforce the probability of a rate cut this month, while a higher-than-expected result might lead investors to question the Fed's strategy regarding interest rates.

Matthew Weller, a strategist at Forex.com and City Index, also reflects on the Fed's commitment to maintaining full employment and stable inflation rates, noting that inflation has stubbornly hovered around the 3% mark after a dramatic drop in 2022 and 2023. Nevertheless, in recent weeks, most Fed speakers have indicated an anticipation of a 25 basis point rate cut in the upcoming December meeting, although this expectation remains tentative.

In the lead-up to the CPI release, market watchfulness is particularly heightened, as many professionals fear an unexpectedly substantial increase in the data could cloud the Fed's path towards a rate cut this month

Conversely, results that align closely with expectations are likely to have minimal impact on market trajectories.

Mona Mahajan, Edward Jones' Head of Investment Strategy, observed that a prevailing sense of caution is evident ahead of the CPI and Producer Price Index (PPI) reports this weekMarket participants are eager to see data that will not disrupt the Fed's decision-making process next weekIf the CPI meets expectations, investors are likely to foresee a definite 25 basis point rate cut from the Fed.

Tom di Galoma, head of fixed-income trading at Curvature Securities, expressed, "I genuinely believe inflation is on the declineHowever, if inflation does rise, it will undoubtedly become a significant concern." His commentary emphasizes the balancing act the Fed faces as it navigates its monetary policy in response to incoming economic data.

Among Fed officials, the clearest stance regarding a potential rate cut in December was taken by Fed Governor Waller, who indicated his support for lowering the policy rate during the upcoming meeting, conditioned on the data leading up to the decision

He candidly stated, “This decision will depend on whether the data we receive before then surprises to the upside and alters my predictions for the inflation trajectory.” The prominence of both the non-farm payrolls from the previous week and the forthcoming CPI data illustrates the stakes involved in these economic indicators.

A recent survey by 22V Research showed that 37% of investors anticipate a "risk-off" reaction from the market in response to tonight’s CPI, the highest percentage in their analysisConversely, those expecting a "risk-on" or "mixed/neutral" response from market participants are similarly represented.

Furthermore, the survey noted that 61% of investors believe that the core CPI is on a “Fed-friendly” downward trajectory, asserting it won’t substantially tighten financial conditions or trigger a recessionThis figure marks the highest level since February