All Eyes are on Inflation Data as Bets on Interest Rate Cuts Unravel

Blisteringly hot economic reports have investors worried about another round of runaway prices

• Wall Street was bloodied as hot U.S. economic data sent bond yields higher.
• U.S. CPI inflation data may dilute Fed interest rate cut speculation.
• The British pound is in focus if U.K. CPI and GDP data revise the BOE outlook

Stock markets swooned as hotter-than-expected U.S. economic data drove down Federal Reserve interest rate cut expectations, pushing up borrowing costs. The bellwether S&P 500 shed 2.1% while the tech-oriented Nasdaq 100 lost 2.3%. Treasury bond rates rose across maturities, but the long end outperformed, steepening the yield curve.

These moves found catalysts in blistering service-sector data from the Institute of Supply Management (ISM), followed by a strong set of official employment figures. Swelling inflation expectations in a consumer confidence survey from the University of Michigan (UofM) served as amplification.

Benchmark Fed Funds futures now price in just 27 basis points (bps) of rate cuts in 2025, followed by 19bps in 2026. That compares with a median projection of 50bps apiece from the Fed’s policy-setting Federal Open Market Committee (FOMC), issued when officials updated their forecasts last month.

Against this backdrop, here are the key macro waypoints to consider.

U.S. consumer price index (CPI) and retail sales data

Headline U.S. inflation is expected to have accelerated for a third consecutive month in December, rising to 2.8% year-on-year. That would mark the highest reading since July.

The core reading stripping out volatile food and energy prices—a focal point for the Fed—is seen holding at 3.3% year-on-year for the fourth month straight.

Headline CPI figures have run a bit faster than the closely watched “nowcast” projection from the Cleveland Fed for the past three months. Moreover, Citigroup analytics suggest overall U.S. economic data outcomes are once again increasingly outperforming relative to baseline forecasts.

That may set the stage for an upside surprise on this week’s reporting. In fact, last week’s leading ISM data foreshadowed a steep pickup in the pace of price growth. Such outcomes may keep yields marching higher, pressuring equities and the strength of the U.S. dollar. Soft readings would stand to deliver the opposite results.

The same dynamics are in play when December’s retail sales report comes across the wires later in the week. The U.S. Census Bureau (USCB) is expected to show that receipts rose 0.5% last month, marking a slight slowdown from the 0.7% increase recorded in November.

U.K. inflation and GDP data

Across the Atlantic, U.K. CPI data is expected to show core inflation eased a bit in December, down to 3.4% year-on-year from 3.5% previously. The headline reading including food and energy costs is penciled in for 2.6%, matching November’s eight-month high.

Later in the week, the monthly gross domestic product (GDP) report may mark a return to growth in November after output contracted 0.1% in October. Analysts’ median projections point to a rise of 0.2%. Unlike the U.S., U.K. data has soured relative to forecasts recently, which may suggest economists’ models are too optimistic and set the stage for disappointment.

As it stands, the Bank of England (BOE) is priced in to deliver 47bps in rate cuts this year. That amounts to the likelihood two standard-sized 25bps cuts, with one appearing at mid-year and the other just before the calendar turns to 2026. Soft outcomes may inspire a dovish rethink.

The British pound stands out as a point of interest in such a scenario. It has been tumbling against the U.S. dollar since peaking in September, touching the lowest level since October 2023 to start this week. If it is able to hold up even as local policy expectations shift toward lower rates, bargain-hunters may emerge to carve out a tradable low.

Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

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