US Inflation Preview: Slipping Oil Prices Set to Fuel Stock Rally, Drive US Dollar Down

Samantha Luan

Commodity

Energy

Forex

Summary:

The retreat in energy prices is set to soften US headline inflation after its recent increase.

Investors envision rate cuts – and the all-important inflation data is unlikely to change their minds. Figures for October are set to show an encouraging decline in headline prices without a meaningful change to core inflation, but markets will likely shrug it off.

Here is a preview of the Consumer Price Index (CPI) report for October, due on Tuesday at 13:30 GMT.

Disinflationary pressures in full force

The pace at which prices rise came a long way down from the peak of 9.1% recorded in June 2022 to 3%, but has since risen to 3.7% YoY in the read for September. Nevertheless, the ongoing decline in economic activity, the unwinding of the leap in prices of used vehicles, and even Oil prices – despite the Middle-East war – have all come down. A fresh drop is on the cards.

Headline CPI is set to come out at 0.1% MoM in October, a significant retreat from 0.4% in September. Even if there is a small upside surprise in the monthly figure, the YoY number will likely be dragged down from 3.7%. That is good news for consumers.

US Inflation Preview: Slipping Oil Prices Set to Fuel Stock Rally, Drive US Dollar Down_1

CPI YoY development. Source: FXStreet

Investors may be more cautious, as Core CPI is projected to remain at 4.1% YoY and rise by 0.3% MoM, a repeat of last month's increase. The Federal Reserve (Fed) is concerned about underlying prices, which are "sticky" and hard to move.

However, some of the upside stems from a lag in measuring housing prices, which are descending, while the moderating pay increase is also set to make its way to Core CPI. The recent Nonfarm Payrolls report showed a substantial slowdown in hiring, which tends to be a precursor to lower wage growth.

I see room for a downside surprise in Core CPI, which would be a welcome development for investors and the central bank, especially if the yearly figure dips below 4%.

US Inflation Preview: Slipping Oil Prices Set to Fuel Stock Rally, Drive US Dollar Down_2

Core CPI YoY development. Source: FXStreet

CPI and markets

Even if both the headline and Core CPI come out hotter than estimated, I expect any nervous market reaction to remain short-lived. Fed Chair Jerome Powell's message was perceived as dovish, and data such as the Nonfarm Payrolls report have convinced markets that the hiking cycle is over. Cuts are already on the horizon.

It would take nasty upside surprises of 0.2% or more to trigger a market rethink. And if the data surprises to the downside, the party on Wall Street would continue, while the US Dollar would suffer another blow.

In case data comes out as expected, the drop in headline inflation will likely trigger an immediate positive impact on equities and put pressure on the US Dollar – even if Core CPI remains stubbornly elevated.

What about Gold? The precious metal is still experiencing major influence from the Middle-East conflict. The lack of any major escalation has weighed on XAU/USD, and a soft inflation print would help it recover, at least temporarily.

Final thoughts

The last mile is always the longest – in a real marathon race and in the long effort to battle inflation. Nevertheless, investors can see the finish line, and they are unlikely to wait for the Fed – nor the data – to tell them.

Sources: FXSTREET

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