Market participants anticipate an impending boost in market sentiment as a new set of inflation data is poised for release in the forthcoming week, with the Consumer Price Index (CPI) data scheduled for unveiling on Thursday.

Should the reports portray a trajectory aligning inflation closer to the Federal Reserve's coveted 2% target, it could signal an imminent culmination of the central bank's series of interest rate hikes that commenced last year. Notably, the preceding June reports already indicated a deflationary trend.

The prospect of the Consumer Price Index maintaining congruence with the Producer Price Index could potentially obviate the necessity for further interest rate escalations by the Federal Reserve. Such a development is anticipated to bode well for equities, constituting a positive narrative for the stock market.

The prior week saw the equity market grappling with challenges, largely stemming from the credit rating downgrade by Fitch. Consequently, the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average encountered declines. Despite making a recovery attempt fueled by moderately lower-than-projected job data for July on Friday, the market still concluded the week on a downward trajectory.

Market sentiment leans towards the consensus that the Federal Reserve is nearing the conclusion of its successive rate-hiking campaign. As depicted by the CME FedWatch tool, approximately 83% of investors anticipate a maintenance of steady rates by the central bank in September. Conversely, about 17% anticipate a 25 basis points increment. Traders remain aligned in foreseeing stable rates for the remainder of the year.

Should the forthcoming July inflation data retain its subdued stance, this could potentially propel the market beyond the narrative that has profoundly influenced equities throughout the past year. Nevertheless, it's worth noting that the Federal Reserve might still execute a final rate hike during its September meeting, deeming it necessary to ensure inflation remains controlled and to prevent a recurrence of the challenges witnessed during the 1970s.

Despite the imminent release of inflation data, prevailing expectations do not anticipate particularly alarming results, even if a marginal uptick from the previous reading is exhibited. Expert projections envisage a 3.3% rise in the Consumer Price Index for July compared to the previous year, an increase from the 3% reading registered in June.

In contrast, the yield on the benchmark 10-year US Treasury note has surged to levels resembling its highest point in over a decade, propelled by emerging convictions that a robust economic landscape can substantiate enduring spells of elevated interest rates.

Friday's 10-year yield settlement rested at 4.060%, retracing slightly following a mixed monthly jobs report. This remained a progression from the preceding week's 3.968% and approached the 14-year pinnacle of 4.231% witnessed in October.

The present ascent of extended-term Treasury yields, which function as influential gauges in determining costs encompassing mortgages to stocks, persists as yields on shorter-term bonds remain in a holding pattern. This sentiment underscores the investor belief that a cooling inflation backdrop coupled with resolute economic expansion might facilitate the Federal Reserve's halting of rate hikes, thus maintaining a status quo until year-end at least.

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Fullerton Markets Research Team
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