HSBC said the upcoming U.S. inflation report could become the next major catalyst for markets.
The bank believes a softer inflation reading may push Federal Reserve rate hike expectations further out of market pricing. It also supports HSBC’s view that the “U.S. exceptionalism” trade is starting to lose momentum.
Fed Rate Hike Bets Face a Reality Check
HSBC Multi-Asset Strategist Duncan Toms said hawkish Fed pricing is now being tested by the latest economic data.
According to Toms, last week’s labor market report added more evidence that markets may have already passed the peak of U.S. Treasury hawkishness.
Since July 23, HSBC noted that markets have already reduced some expectations for future U.S. rate hikes.
HSBC Launches New Labor and Inflation Dashboards
To monitor these changes more clearly, HSBC introduced two new dashboards.
One focuses on the U.S. labor market, while the other tracks U.S. inflation.
The dashboards combine data into two main indicators: a “Labour health” series and an “Inflation heat” series.
Labor and Inflation Remain Key Market Drivers
Toms said labor market health is important because it helps determine whether markets move into a risk-on or risk-off mood.
Inflation trends are also critical. HSBC said stronger or weaker inflation signals are closely linked to either a Goldilocks market backdrop or a reverse Goldilocks scenario.
A Goldilocks environment usually means growth is stable, inflation is cooling, and central banks face less pressure to tighten policy.
June Inflation Was Already Dovish
HSBC said June’s inflation report was unexpectedly dovish.
The bank added that the softer reading was not only due to weaker oil prices. Instead, the slowdown appeared broader.
HSBC’s current estimates suggest Wednesday’s inflation data could also deliver a benign result.
Softer CPI Could Push Rate Hikes Out of Pricing
According to HSBC, another soft inflation print could become the next dovish catalyst for markets.
The bank said this could push Fed rate hike expectations further out of pricing.
If that happens, HSBC expects the U.S. Treasury curve to bull-steepen, meaning shorter-term yields could fall faster as investors price out additional Fed tightening.
A Goldilocks Setup for Markets
Toms said this kind of environment could create a powerful Goldilocks backdrop.
That could support broad gains across many asset classes, especially if investors become more confident that inflation is cooling while growth remains resilient.
HSBC continues to move away from the U.S. exceptionalism trade, arguing that the data no longer fully supports the idea that the U.S. economy will keep outperforming other major regions.
Markets Await the Inflation Test
Wednesday’s inflation report may now be one of the most important data releases for the Fed outlook.
A softer reading could strengthen expectations that the central bank can stay on hold. However, a hotter inflation print could bring rate hike concerns back into focus.
For now, HSBC sees the balance of risks shifting in a more dovish direction.
