The Good, The Bad, The Ugly By Investing.com

The upcoming consumer price index (CPI) release on Wednesday is poised to be a pivotal moment for financial markets, with potential outcomes ranging from “good” to “bad”, according to Sevens Research in its latest note.

The results could significantly influence expectations for a Federal Reserve interest rate cut in September and influence stock market performance.

Federal Reserve Chairman Jerome Powell has stressed that favorable inflation data is crucial for a September interest rate cut.

According to Sevens, a “good” CPI report would show a core CPI below 3.4% year-on-year and an overall CPI of 3.1% or less.

They believe such results would likely support the case for an interest rate cut, making it almost a certainty and further driving stock market gains.

Sevens Research predicts that under these conditions, it is likely to continue its upward trend, with growth and defensive sectors leading the way.

Additionally, they say a favorable CPI could drive it below 4.20% and weaken the dollar index, potentially boosting commodities like gold.

Conversely, the firm says a “bad” CPI report with core CPI at or above 3.4% and headline CPI between 3.2% and 3.3% would signal only a minimal drop in inflation.

They explain that this result could diminish the Fed’s incentive to cut rates, leading to a modest negative stock market reaction. In that scenario, Sevens says Treasury yields could rise and the dollar index strengthen, causing commodities to experience moderate declines.

Finally, an “ugly” CPI report, showing core CPI above 3.4% and headline CPI above 3.3%, would likely lead to a sharp market selloff, according to the company.

With inflationary pressures bucking the current disinflationary trend, equity prices could fall more than 1% and Treasury yields could rise, challenging recent market gains, they add.

Sevens adds that the dollar index is likely to rise and even positive news elsewhere may not prevent a significant market pullback.