As US stocks remain fragile, tonight’s CPI may deliver a “hawkish surprise.”

``` As U.S. stocks are experiencing a broad sell-off, the January CPI data to be released on Friday faces the risk of exceeding expectations. Wall Street generally expects core CPI month-over-month to rise from 0.2% to 0.3%. At the same time, multiple investment banks warn that the actual reading may be even higher. The probability of a "hawkish surprise" is greater than a "mild surprise," which could bring a new shock to the fragile market. At 21:30 Beijing time tonight, the January CPI data—delayed for several days due to the government shutdown—will be released. According to Wall Street consensus expectations: - CPI is expected to rise by 0.3% month-over-month, the same as in December, and decrease year-over-year from 2.7% to 2.5%. - Core CPI is expected to rise from 0.2% to 0.3% month-over-month compared to December of last year, and decrease year-over-year from 2.6% to 2.5%. But these expectations may underestimate the impact of price pressures at the start of the year and seasonal distortions. Forecasts from several institutions are more hawkish—J.P. Morgan expects core CPI to increase by 0.4% month-over-month, stating that early-year price pressures will push up January's CPI, while December data was suppressed due to lingering effects of the October and early November federal government shutdown. This week, market sentiment has clearly turned defensive. Concerns about artificial intelligence disrupting business models across industries are spreading. Combined with U.S. existing home sales falling by the largest margin in four years and triggering safe-haven trades, investors are selling stocks, commodities, and cryptocurrencies simultaneously. Against this backdrop, marginal changes in the CPI are amplified. With weaker-than-expected retail sales data offsetting a stronger-than-expected non-farm payrolls report, this CPI release is especially important. Multiple Factors Point Toward Upside Risks J.P. Morgan Chief Economist Michael Feroli expects January CPI to rise 0.3% month-over-month (precisely 0.35%), and core CPI to rise 0.4% (precisely 0.39%). This forecast is above market consensus, mainly due to early-year price pressures and significant residual seasonality in the CPI data. Feroli notes that December's CPI reading is typically one of the lowest of the year, in part due to lingering effects of last year's federal government shutdown from October to early November. Historical data shows that weak December readings are often followed by stronger January readings—the clear seasonal distortion between December and January is not unrelated. He reminds investors not to over-interpret signals of slowing inflation from the December report. J.P. Morgan also emphasizes potential drivers for a re-acceleration of future inflation. Given that tariff-related costs will pass on to consumers this year and the trade-weighted U.S. dollar index has continued to weaken over the past year, the bank expects inflation to re-accelerate for some time. J.P. Morgan's trading desk believes the probability of hawkish data is greater than that of mild data. Recently, the rates market has shown a bullish flattening trend, reflecting market expectations that macro data will weaken, with investors increasing duration ahead of the next batch of risk events. In addition, curve steepening was a consensus trade earlier, so some closing of those trades makes sense in a more uncertain data environment. Component Data Hide Pressure In terms of energy, J.P. Morgan expects a modest decline in energy prices, but the decrease in gasoline and fuel prices will largely be offset by surges in electricity and residential natural gas prices. The weather was warmer than average early in January, but by month-end, winter storms swept most of the United States, causing a sharp drop in temperatures. Food prices are expected to remain moderately firm, albeit rising less than last December’s strong growth. Housing-related prices are expected to remain firm. Owners' equivalent rent and tenant rent will be close to December levels, with month-over-month gains around 0.3%, slightly below last year's levels. Although these rent inflation indicators are expected to cool gradually this year, the process will be gradual, and early-year annual rent inflation will remain about 3%. After a sharp increase in December, prices for lodging away from home are expected to fall back somewhat in January but remain firm (0.6%). Goldman Sachs highlights five key component trends: - First, seasonal distortions will put upward pressure on the communications category (Goldman forecasts +0.4%) and private transportation category (+1.5%). Second, annual price resets for categories such as healthcare goods will bring a moderate boost (Goldman forecast +0.7%). - Third, tariffs will create upward pressure on especially sensitive categories, expected to add 0.07 percentage points to core inflation in January. Goldman expects tariffs to drive up prices in apparel (+0.5%), recreation (+0.4%), education (+0.2%), household goods (+0.7%), and personal care (+0.2%). - Fourth, travel services inflation will hold firm. Alternative price data signals suggest airfares will rise by 2% and hotel prices by 1%. The rise in airfares reflects a gentle seasonal boost and baseline price increases shown in online pricing data. - Fifth, auto inflation is relatively weak. Auction price signals point to a 1.5% decline in used car prices; new car prices will remain flat, with tariff pressure offset by increased new car sales incentives; auto insurance will rise moderately (+0.4%), reflecting premium growth in online data sets. Market Prepared for Volatility J.P. Morgan has devised a market reaction matrix for different core CPI month-over-month readings. - If core CPI MoM exceeds 0.45%, the S&P 500 is expected to fall 1.25%-2.5%, but this scenario occurs only 5% of the time. - If the reading lands between 0.40%-0.45%, the S&P 500 is expected to rise 0.25% to fall 0.75%, probability 25%. - If core CPI MoM is between 0.35%-0.40%, the S&P 500 is expected to rise 0.25%-0.75%, with the highest probability at 42.5%. - If the reading is between 0.30%-0.35%, the S&P 500 is expected to rise 1%-1.5%, probability 22.5%. - If the reading is below 0.30%, the S&P 500 is expected to rise 1.25%-1.75%, probability also only 5%. Options straddles show that the market is priced for a post-release move of about 1.1% after Friday’s data. J.P. Morgan’s trading desk says that while it agrees hawkish data is more likely, it does not expect the market to react as violently as it would to stagflationary data—which would typically see cyclicals and consumer staples sold off. Risk Warning and Disclaimer The market involves risks, and investment should be made cautiously. This article does not constitute personal investment advice and has not considered the unique investment objectives, financial situations, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their particular circumstances. Investing accordingly is at your own risk. ```