Wall Street Eyes How Inflation Data Will Impact US Stocks Ahead of CPI Release

TradingKey - At 8:30 a.m. ET on Wednesday, the U.S. Bureau of Labor Statistics will release the February Consumer Price Index (CPI) report, which traders view as the tone-setter for investment direction.

Amid the dual variables of the Iran war and the AI shock, this report could become a key turning point for Fed policy expectations and market direction. Following the prelude of unexpectedly soft employment data, Wall Street is focusing its attention on this CPI data.

Economists surveyed by Dow Jones expect the CPI to rise 0.3% month-over-month and 2.4% year-over-year. Excluding volatile food and energy, core CPI is expected to rise 0.2% month-over-month and 2.5% year-over-year.

Assuming the market remains unemotional and is driven by data results, if the CPI misses expectations and inflation expectations cool, reinforcing rate cut hopes, it would be a tailwind for high-growth tech stocks; however, for the real economy, capital withdrawal from traditional asset-heavy sectors could put downward pressure on those segments.

Some market participants believe that even if inflation data retreats moderately, short-term performance of U.S. stocks may still be suppressed. Wells Fargo analyst Ohsung Kwon noted in a report that against a backdrop of still-weak economic growth momentum, the S&P 500 may find it difficult to break through key resistance levels in the short term unless the Fed releases a clearer easing signal or economic growth re-accelerates.

Meanwhile, against the backdrop of BlackRock (BLK.US) recently announcing redemption limits on certain funds, market focus on liquidity is rising. If rate cut expectations continue to heat up and drive companies to further expand their financing, it could exacerbate leverage accumulation in the financial system and, to some extent, increase capital mismatches and liquidity pressure.

In this environment, once the market questions the valuation or liquidity of certain assets, investor confidence could quickly weaken, triggering concerns over the funding stability of asset management institutions. If the confidence shock spreads further, combined with the continuous expansion of financing by high-growth tech companies, the risk of potential concentrated redemptions or liquidity runs could also rise.

Holding a contrary view, Sarah House, a senior economist at Wells Fargo, stated that the U.S. February CPI may show that progress in lowering inflation has stalled once again. Although the U.S.-Iran war broke out in late February, oil and gasoline prices had already begun to rise in February amid expectations that the conflict could escalate.

Tiffany McGhee, Chief Investment Officer at Pivotal Advisors, said that in an environment of sticky inflation, assets related to the real economy typically show more resilience, including sectors such as energy, infrastructure, and commodities.