Yesterday, US stocks pulled back. Besides the AI sector adjusting on its own, the move was largely driven by a risk-hedging mood ahead of tonight’s CPI release.

On paper, the data outlook looks fairly friendly: broad CPI had a prior reading of 4.2%, the market consensus is 3.8%, and the Cleveland Fed’s Nowcast even points to 3.7%, making the expectation of falling inflation fairly clear. More importantly, for core inflation, the prior reading was 2.9%, market expectations are steady at 2.9%, and the Cleveland forecast edges down slightly to 2.8%. Against the backdrop of the recent drop in actual oil prices, there’s a fairly high probability that core inflation will be maintained at least unchanged.

But geopolitical risks have thrown the script off. The US-Iran conflict suddenly escalated—Iran blocked the Strait of Hormuz, and in addition to a forceful response, the US also floated an aggressive plan to impose a 20% “toll” on commodities charged in the past. Although many views consider this to be “careless talk,” the market clearly bought it: Brent surged above $85, and WTI pushed toward $80, fully overturning the prior view that oil prices would weaken. In past minor flare-ups, the market assumed that peace and open shipping lanes were the big premise—this time, it’s different.

This suggests the “downward and benign CPI” scenario may not hold. If a full-scale war breaks out or if the Hormuz toll taxes are implemented, expectations for a rapid rebound in August inflation will quickly build momentum, and the prior trading logic of disinflation/rate cuts will face revision. #CPI,