The upcoming inflation report from the USA is due to release next week. According to economists, the reading of this inflation report will answer one of the most pressing questions of Wall Street: Is the market's estimate for the interest rates in the short-term correct or not?
After the banking crisis that embroiled last month, economists are now more convinced than ever that the Fed will introduce rate cuts instead of rate hikes. This is based on the recent economic downturn that has started to show its effects on the U.S. population.
As a result of such market sentiment, the US bond yields have turned lower while the growth stocks & the big tech stocks are showing promising signs. This has pushed the tech-heavy S&P 500 index up by 6.9%, and we are only a few months into 2023.
Hot Inflation Will Lead To More Rate Hikes
So far, the Fed's outlook remains very restrictive and will likely keep the borrowing costs at the same levels during 2023. And if the inflation report due next week shows a strong upside, it will give more credence to this view of the Fed.
A hot CPI report means the market will have to adjust its policy of the Fed interest rates amid the high asset prices. According to one asset management firm, corporate profits, and consumer spending will likely take a hit due to the rate hikes.
Earlier, March's employment data has already shown that the labor market is very tight, which means Fed has nothing stopping it from jacking up the rates once again.
Meanwhile, the worries of recession in the US are also mounting, and we have already seen a shakedown in the banking system with the collapse of Silicon Valley Bank.
The bond market, which serves as a recession indicator for the Fed, is also at record lows which pushes the need for rate cuts instead of rate cuts.
So as you can see, there are strong cases for both rate hikes as well as rate cuts from the Fed! But after the recent inflation report, the fog will disappear, and investors will clarity on the next Fed's action.