Trump-Led Market Honeymoon Faces Crucial Test With Wednesday's Inflation Data

Risk assets have surged since Donald Trump's 2024 presidential win, fueled by investor optimism for tax cuts and renewed hopes of financial sector deregulation.

Yet, markets may face a reality check on Wednesday when October inflation data is released, as signs of lingering price pressures could cool the recent euphoria and shake expectations for the Federal Reserve’s interest rate cuts.

Inflation Expected To Edge Up In October

Economists predict that October's Consumer Price Index (CPI) data will show a modest uptick in inflation, potentially halting the downward trend observed over the past six months.

The economist consensus points to a 2.6% year-over-year rise in headline inflation, up from 2.4% in September.

If accurate, this increase would mark the first inflation acceleration since March and could dampen hopes of a sustained disinflationary trend.

On a monthly basis, headline inflation is expected to rise by 0.2%, in line with September’s reading. Meanwhile, core inflation—which excludes volatile food and energy prices and provides a clearer view of underlying price pressures—is forecasted to remain steady at 3.3% year-over-year, with a 0.3% monthly gain.

This resilience in core inflation could raise questions about the persistence of price pressures across key consumer sectors.

Analysts Sound Warnings On Upside Inflation Risks Under Trump

According to Stephen Juneau, an economist at Bank of America, "inflation is moving sideways after a period of substantial disinflation."

Bank of America forecasts a slight monthly gain of 0.1% in headline CPI and a 0.3% rise in core CPI, which would keep annual rates unchanged at 2.4% and 3.3%, respectively.

While these numbers suggest inflation is not accelerating aggressively, Juneau cautions that the outlook could change if pro-growth fiscal policies, tariffs, and tighter immigration policies are enacted.

"We now see the risks as clearly tilted to the upside," he added, citing Trump's policy proposals as potential drivers of renewed inflationary pressures in the upcoming quarters.

Goldman Sachs economists Ronnie Walker and Jessica Rindels also anticipate a firm core inflation reading, with an estimated 0.31% month-over-month surge, keeping the annual core CPI at 3.3%.

Goldman Sachs highlights specific areas likely to drive inflation, including auto insurance premiums, which continue to see increases, albeit at a slowing pace, and flat health insurance costs.

Walker and Rindels expect "further disinflation in the pipeline over the next year from rebalancing in the auto, housing rental, and labor markets," but warn of potential "catch-up inflation" in areas like car insurance.

Their forecast suggests that while the broader disinflationary trend might continue, pockets of inflation could persist, challenging the narrative of a quick return to low inflation.

Market Implications: Will The Fed Stay Dovish?

If inflation data exceeds expectations, it could challenge the Federal Reserve's dovish stance.

Fed Chair Jerome Powell has signaled openness to further rate cuts, with markets currently expecting a 25-basis-point reduction in December. Fed futures are currently assigning a 65% chance of a December rate cut, as per the CME FedWatch tool.

Yet, any signs of re-accelerating inflation could prompt the Fed to reconsider its easing timeline, especially if Trump's anticipated fiscal policies stoke demand-side inflation.

A higher-than-expected CPI reading could also weigh on risk assets, particularly if investors perceive that inflationary pressures could delay rate cuts or trigger a more cautious Fed.

Major U.S. equity indices, as tracked by the SPDR S&P 500 ETF Trust (NYSE:SPY), the tech-heavy Invesco QQQ Trust (NASDAQ:QQQ), and the SPDR Dow Jones Industrial Average ETF (NYSE:DIA), are likely to experience volatility if investor expectations for a December rate cut fall.

Sectors sensitive to interest rates, such as technology and consumer discretionary stocks, may be especially vulnerable if inflation concerns resurface.

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