Inflation "transitory theory" reappears! Wall Street bullish on CPI release, US stocks continue to rise.

Economists predict that the latest consumer price data will show a slight increase in inflation, but Wall Street professionals are not worried that this will disrupt the recent surge in the stock market. The inflation impact of President Trump's comprehensive global tariffs is expected to start showing in the latest CPI data, which will be released before Tuesday's opening. However, Wall Street investment banks including JPMorgan Chase and Morgan Stanley expect investors to ignore these concerns and instead focus on strong corporate earnings and rate cuts to keep stock prices soaring. Andrew Taylor, global market intelligence director at JPMorgan, wrote in a report to clients on Monday that "macroeconomic data still supports reasons to be bullish, and earnings may maintain their positive trend," adding that the Fed continues to move towards rate cuts. Taylor believes any potential increase in inflation may be temporary, and peak levels may be lower than expected. In fact, his team has pegged the likelihood of further gains in the S&P 500 index after the release of CPI data on Tuesday at 70%, predicting that if the data meets or falls below expectations, the index could rise by 2%. CPI release expected to boost the S&P 500 index Taylor wrote that the main risk of a pullback is seasonal, as the S&P 500 index has averaged a 1.5% decline in September over the past 25 years - but then rises by 4% in the fourth quarter. According to a Bloomberg survey of economists, the core CPI, excluding volatile food and energy costs, is expected to rise by 0.3% in July compared to June. This would be the largest increase since the beginning of the year - a slight increase of 0.2% in June. However, according to trading data from Citi's trading department, options traders are mostly unaffected by the report before its release, with the pricing of two-way volatility in the S&P 500 index at about 0.74% and the 12-month average implied volatility close to 1%. The S&P 500 index was trading close to historic highs before the data was released on Tuesday, surging 28% from its April low, setting 10 new records in July alone. These significant fluctuations are worth noting, as investors have little insight into how Trump's trade plans will impact the economy. But the market may not necessarily view bad news as bad news. For example, recent employment data showed a significant slowdown in the job market, prompting Trump to dismiss the head of the Bureau of Labor Statistics and accuse her of political bias without evidence. Wall Street is ignoring this and instead focusing on how these data support Fed rate cuts. This seems enough to keep the stock market climbing, despite these numbers indicating the possibility of stagflation, where prices rise but growth does not. Michael O'Rourke, chief market strategist at JonesTrading LLC, said, "Given the weak July employment report, investors are more confident in the Fed's return to easing next month than in expected inflation." Three Fed officials - Vice Chairman Michelle Bowman, Governor Christopher Waller, and Minneapolis Fed President Neel Kashkari - all expressed concerns about the U.S. labor market last week and indicated that a rate cut may be necessary in September. Mike Wilson, Chief U.S. Equity Strategist at Morgan Stanley, also expects a significant rate-cutting cycle to lay the foundation for a stock market rally next year, despite some short-term issues. Wilson told clients in a weekly commentary on Monday, "Ultimately, our internal view is that the inflation triggered by tariffs will fade later this year, paving the way for a significant rate-cutting cycle, which supports our constructive long-term outlook for the U.S. stock market."