U.S. stocks may not fear the impact of inflation data as investors bet on the "lagging and controllable" effects of tariffs

According to Zhitong Finance APP, ahead of the upcoming U.S. Consumer Price Index (CPI) for May, some investors are reassessing the true impact of tariffs on the market and inflation, forming a different consensus from previous market views. Gang Hu, a trader at New York hedge fund WinShore Capital Partners, pointed out that even if inflation data performs poorly, the stock market is still expected to maintain an upward trend, as the impact of tariffs on prices is being viewed by the market as "delayed but predictable."

This stands in stark contrast to the widespread pessimism in early April. At that time, the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite Index quickly fell to 52-week lows after Trump’s 10% tariffs on imports from most countries took effect. However, Hu believes that the market has gradually digested the short-term effects of such trade policies and is instead seeing operational space brought about by "delayed pricing."

Hu noted that according to corporate interview data from the Federal Reserve's Beige Book released last week, many companies plan to pass on tariff-related costs to end prices starting in August, which means that the peak of core CPI may also occur in August. He estimates that the monthly increase in core CPI could rise from 0.2% in April to over 0.4% in August, before dropping below 0.2% in November and December, and then rising again to about 0.3% in March next year.

However, Hu emphasized that these forecast numbers are merely superficial, stating, "In reality, the market is as confused as the Federal Reserve." He added that the market has not priced in the potential rapid emergence of a "wage-inflation spiral" or a possible economic recession, both of which could quickly change the market trajectory if they materialize.

Despite a surge in U.S. unemployment claims last week and unexpected contraction in service sector activity raising concerns about an economic slowdown, the U.S. economy has not entered a recession as pessimistically expected. In this context of "no hard landing," the U.S. stock market has remained stable, with all three major indices closing higher on Monday. The S&P 500 and Nasdaq indices even reached new highs since February, closing at 6005.88 points and 19591.24 points, respectively, although the market still harbors doubts about inflation potentially triggered by tariffs.

Barclays analysts also warned on Monday that "stagflation-like" phenomena are re-emerging in the data, and the inflation data to be released this week may clearly show the price pressures caused by tariffs for the first time. However, despite the intertwining signs of economic growth slowing and rising prices, yields on U.S. Treasury bonds from one year to thirty years have declined simultaneously. The latest survey from the New York Fed shows that consumer expectations for future inflation across the U.S. have generally fallen in May.

Hu has been quite accurate in his judgments about inflation. As early as July 2022, he pointed out that "inflation will last longer than the market expects," a prediction that was later validated; in February 2023, he anticipated that inflation would need to persist for at least another year for the Federal Reserve to cut interest rates, and indeed, the Fed kept rates at 5.25%-5.5% after raising them in July that year, not initiating cuts until September 2024.

In his view, tariffs are a "double-edged sword": they could either trigger persistent inflation, leading the Federal Reserve to maintain high interest rates, or drag down economic growth and trigger a recession, creating significant uncertainty in policy paths. He pointed out that the market volatility seen this year has demonstrated the possibility of such extreme scenarios In February, the S&P 500 and Nasdaq respectively reached year-to-date closing highs of 6144.15 points and 20056.25 points. Less than two months later, on April 8, they fell to 4982.77 points and 15267.91 points, but this week they quickly rebounded to the highs since February.

"In the current context of uncertainty, the market can still operate relatively stably," Hu said. "Interest rate expectations may be either high or low, and the rate cut in 2025 could be zero or 100 basis points. Daily price fluctuations will be significant, and asset prices will fluctuate rapidly, but overall they are still operating within a range. The real key issue is whether the initial inflation shock will trigger secondary effects, such as a wage-price spiral? By September of this year, we may be able to see some clues."

Economists generally expect the U.S. May CPI year-on-year rate to be 2.5%, with the core CPI month-on-month rate at 0.3%, which is relatively mild compared to April's data. The Producer Price Index (PPI) will be released on Thursday, with an expected month-on-month increase of 0.2%, rebounding from last month's decline of 0.5%