Stubborn Powell, resilient CPI, buckle up tonight!

As the U.S. labor market cools and stabilizes, Jerome Powell's strong statements overnight make tonight's CPI data, to be released at 21:30, very important.

Although the Federal Reserve has claimed that "inflation is controllable," the core inflation rate has remained stubbornly above 3%. Currently, with the implementation of Trump's tariff policies and the rebound in energy and major food prices, the market is holding its breath for signals of "overheating" inflation.

The market generally expects that in January:

• CPI will increase by 0.3% month-on-month, slightly lower than last month's increase of 0.4%;
• CPI will rise by 2.9% year-on-year, unchanged from last month, marking a five-month high;
• Core CPI will increase by 0.3% month-on-month, higher than last month's 0.2%, with Goldman Sachs' forecast slightly above market expectations—core CPI is expected to rise by 0.34% month-on-month and 3.19% year-on-year;
• Core CPI will rise by 3.1% year-on-year, lower than last month's 3.2%.

It is worth noting that January's CPI will also incorporate two annual updates, including seasonal adjustments and weight adjustments, which may potentially disturb the data. Goldman Sachs expects that the monthly inflation rate for CPI will be around 0.25% in the coming months, and by December 2025, the year-on-year core CPI inflation rate will be about 2.8%, with the core PCE inflation rate at 2.6%.

Tonight at 23:00, Powell will also deliver his semi-annual monetary policy testimony before the House Financial Services Committee, which may provide more clues about this year's monetary policy direction. Overnight, Powell stated at the Senate hearing that the economy remains strong, and the Fed hopes to continue making progress in reducing inflation, there is no reason to rush to cut interest rates, and the policy is prepared to respond to risks and uncertainties; the labor market is not a major source of inflationary pressure.

January CPI May Have "Hot" Surprises

Given the rebound in energy prices in January, the surge in prices of several major food items such as eggs, and the fact that January data has often exceeded Wall Street expectations in recent years, some analysts believe that this January's CPI data will be hotter than the market imagines.

Goldman Sachs' forecast is slightly higher than the general market expectation, predicting an overall CPI increase of 0.36% month-on-month and a year-on-year increase of 2.96%, with January core CPI expected to rise by 0.34% month-on-month and 3.19% year-on-year.

Although last month's CPI report was below expectations, analysts believe that the likelihood of January's CPI declining for two consecutive months is low. The rebound in energy prices, rising prices of major food items (such as eggs), the wealth effect brought about by the stock market rise, and the high correlation between CPI and the ISM services price index all suggest that inflation may see a more significant increase

Historical data shows that CPI data in January often exceeds expectations. Although Goldman Sachs believes that due to the easing of price pressures over the past year and seasonal factors already anticipated for a significant increase in January, this year's "January effect" may weaken, but inflationary upward risks still exist.

Other Inflation Drivers: Automobiles, Insurance, and Communications

Goldman Sachs' Jan Hatzius team pointed out in a report on the 10th that three major components may dominate the January CPI trend:

1. Automobile Prices: Used car prices are expected to accelerate by 1.5% (previous value 1.2%), while new car prices are expected to increase by 0.5% month-on-month, mainly due to reduced dealer promotions (January incentives decreased by 12% month-on-month).
2. Automobile Insurance: The month-on-month increase in premiums may expand from 0.4% to 0.75%, reflecting the lagged transmission pressure of repair costs and litigation expenses. Goldman Sachs warns that the premium increase in February may further expand.
3. Communication Services: Affected by postal rate increases and seasonal adjustments, the communication component may reverse the deflation trend, with an expected month-on-month increase of 0.5% (previous value flat).

In addition, Goldman Sachs expects that inflation in airline ticket prices will slow down this month, and housing rents (including owners' equivalent rents and actual rents) will also ease slightly. The monthly inflation rate for CPI is expected to be around 0.25% in the coming months. By December 2025, the year-on-year inflation rate for core CPI is expected to be around 2.8%, and the core PCE inflation rate is expected to be 2.6%.

It is worth noting that this CPI report will introduce two key adjustments. First, seasonal factor updates. Goldman Sachs pointed out that based on the price fluctuation data of 2024, the revisions may weaken last year's core inflation's "abnormal seasonal fluctuations." Historical data shows that the first annual revision averages offset 20% of monthly data deviations.

Secondly, adjustments to consumption weights will be made using the 2023 consumer expenditure survey data. However, Goldman Sachs believes that due to the dramatic changes in consumption structure in 2022, this adjustment will have limited impact on the weights of individual components.

Market on High Alert

If the CPI exceeds expectations, it will inevitably compress the Federal Reserve's subsequent rate cut space, putting pressure on U.S. stocks and potentially keeping the dollar strong.

Regardless of whether the January CPI data "explodes," the market has entered a period of high volatility. The implied volatility of S&P 500 index options indicates that the market expects a significant 1.3% fluctuation after the CPI is announced tonight, which is the largest implied volatility before a CPI announcement since the regional banking crisis in 2023.

Another point to note is that tonight's CPI is crucial for the U.S. bond market. According to Goldman Sachs analyst Paolo Schiavone's warning, the CPI data results will open the door for the bull-bear battle in the bond market. **

If a bull market occurs, possible driving factors include the issuance of the Besant coupon, DOGE, and relaxed regulatory measures; while the focus in a bear market includes rising inflationary pressures, future issuance schedules, and changes in the Japanese market's demand for fixed income products.

After Powell stated overnight that the Federal Reserve does not need to rush to cut interest rates, U.S. Treasury yields rose across the board, with the 10-year Treasury yield increasing by 4 basis points, approaching 4.55%. The swap market currently expects that the remaining rate cuts in this policy cycle by the Federal Reserve will be less than two 25 basis points.

In addition, the U.S. government will issue approximately $67 billion in 10-year and 30-year Treasury bonds this Wednesday and Thursday, which will also impact the market.

It is worth noting that last month's slightly eased inflation data had previously driven a rebound in U.S. Treasuries. However, an increasing number of investors and consumers are concerned that Trump's tariff policies and the escalating trade tensions will exacerbate inflation in the coming months, which may limit the rebound potential of the bond market