About tonight’s CPI data, Migo wants to share his current thoughts

At present, the market’s mainstream logic is that the core contradiction behind it is: the Federal Reserve’s policy space is being choked by oil prices.

The market’s overall contest logic can be broken down into four levels:

🔗 1. Oil prices are the “seven inches” of inflation and also the “shackle” of policy
What the Fed is most worried about right now isn’t goods prices, but the “second-round transmission” of oil prices.

As long as oil prices don’t fall, inflation can’t come down, and the Fed can’t loosen.

Recently, tensions in the Middle East have remained high. Passage through the Strait of Hormuz has been disrupted. WTI crude surged more than 9% in a single day to above $80. If oil prices stay elevated or even continue to rise, they will directly transmit to terminal prices through the chain of “energy → transportation → production costs.” Then, even if tonight’s CPI print is relatively low due to June’s oil price decline, the July data could still be quickly pushed up.

The market is already trading this logic— the probability of a July rate hike has jumped from below 10% a week ago to nearly 50%.

📊 2. Tonight’s CPI might look “pretty good,” but the core is the real hard bone
Market expectations are that June’s overall CPI year-on-year will fall from 4.2% to 3.8%, and the month-on-month rate could even show negative growth for the first time since 2020. But this “cooling” is almost entirely driven by the drop in gasoline prices— from mid-May to the end of June, gasoline prices fell cumulatively by about 15%.

The real trouble is core CPI. It’s expected to edge down only slightly year-on-year from 2.9% to 2.8%, while the month-on-month figure still rises by 0.2%. Sticky categories like housing, auto insurance, and service prices remain firm.

Fed Governor Waller has drawn a red line— if core inflation data turns hot again, the FOMC will need to consider hiking rates in the near term. The Fed’s true “pain point” is core inflation, not the overall data being swayed by oil-price volatility.

🤔 3. What the market is trading is the risk of a “forced rate hike”
Wall Street’s main anxiety right now is: if inflation sticks due to oil prices, the Fed will be forced to act in July.

Money market data shows the probability of a July rate hike has risen to nearly 50%, and the two-year Treasury yield has surged to 4.28%, the highest level in over a year. This means that regardless of what tonight’s CPI data shows, the market has already priced in the rate-hike risk quite fully. If tonight’s data comes in soft, it may temporarily ease pressure, but as long as oil prices don’t fall and the Middle East doesn’t calm down, the sword of a rate hike will always hang over the market.

⚖ 4. The Fed’s “impossible triangle” of policy
The Fed is facing a dilemma:

To reduce inflation, it needs to suppress demand, but it needs high interest rates

High interest rates will weigh on the economy, and they can’t directly solve the oil-price problem

Oil prices are driven by geopolitics, and the Fed has no real control over them

Goldman’s view is that the transmission effect of the Iran-Iraq conflict on inflation will clearly weaken in the third and fourth quarters. But that assessment relies on the assumption that the conflict won’t escalate further— and the current situation is actually moving in the opposite direction.

💎 Migo’s personal summary
Tonight’s CPI data will most likely be “overall looking good, core looking bad.” Your call— “oil prices go up → inflation is high → need a rate hike → so you need oil prices to come down”— fully captures the core contradiction of the current market’s struggle.

But the key is this: whether oil prices can come down isn’t something the Fed decides. It depends on the situation in the Middle East. What the market is betting on is that if oil prices can’t fall, the Fed will be forced to hike in July. Tonight’s CPI data is only the first step in this chess game. What truly determines the direction is the path of oil prices and core inflation.

To put it bluntly, the market isn’t afraid of CPI being high—it’s afraid that oil prices will stay high for good, and that’s the real problem.

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