Headed into the new week, there was a “building hot inflation whisper.”

Speculation around an upside print from US CPI data due Tuesday “has been leaking out into the market across some macro dinners around the Street,” Nomura’s Charlie McElligott said. Apparently, there’s “some +0.6% MoM chatter.”

High drama around the latest inflation reading in the US is contextualized by January’s jobs scorcher, ISM services kicker and subsequent Fed banter, all of which contributed to last week’s selloff in Treasurys. Consensus expects 0.5% from the headline MoM CPI print and 0.4% on core.

If the 0.6% “whispers” were borne out, the market reaction would likely be adverse. The build up of speculation could mute the psychological impact of an upside surprise (it’s not a “surprise” if you expected it), but that wouldn’t prevent the instinctual, algo-driven “dollar up,” “yields up,” “stocks down” knee-jerk market reaction that’d invariably accompany the initial blast of Bloomberg red heds.

Rate hike premium was added back at the front-end last week. Terminal rate pricing shifted up and out, and bouts of re-steepening in M3Z3 suggested the market is at least less convinced of a quick pivot to easing, a small win for Fed officials hoping their “higher for longer” mantra will finally resonate.

“Beyond the terminal funds rate, we believe it will be hard to materially dislodge the easing priced in the near-term, irrespective of the inflation outcome,” Goldman’s Praveen Korapaty wrote.

“Although next week’s CPI report will be important — our economists expect the core measure to be strong (and likely above current consensus) — markets have already priced a roughly two-in-five chance of the Fed hiking above our 5-5.25% terminal rate projection, which limits the scope for much additional repricing in our view,” Korapaty went on.

In all likelihood, this week’s CPI report will show a fading disinflationary tailwind on the goods side and services inflation will remain far too high. That combination should bolster the MoM prints. Recall that used car prices unexpected rose+ in January.

Although wage growth has moderated, it’s still nowhere near+ the range consistent with the Fed’s 2% goal. Hot wage growth leaves the risks to services sector inflation biased to the upside. On a YoY basis, core CPI is seen rising 5.5%. That’d be the coolest since December 2021.

“A strong jobs backdrop will put CPI into context regardless of the print itself; after all, core inflation will either point to the ‘obvious’ need for the Fed to push further into restrictive territory or reflect the progress policymakers have made toward securing the anchor of inflation expectations,” BMO’s Ian Lyngen and Ben Jeffery wrote. “As it presently stands, investors are biased for an upside surprise.”

Inflation uncertainty is near all-time highs in data back to 1978, according to the University of Michigan’s survey, and consumers’ near-term outlook for price growth picked up to 4.2% in early February.

“The January CPI report is key for markets, particularly as media reports have suggested that some earlier easing in price pressures (such as in used car prices) may have gone into reverse,” TD strategists including Oscar Munoz and Jan Groen said. “A stronger than expected CPI print would likely reinforce the recent strong economic data theme, pushing market pricing for upcoming rate hikes even higher [but] the risks to the market’s reaction are binary; while a stronger CPI print will lead markets to pencil in more rate hikes, a softer than expected print may reinforce Powell’s dovish remarks, increasing the odds that the Fed stops hikes sooner.”

CPI isn’t the only notable on the US data docket this week. In addition to PPI (which, if it’s hot, could be insult to injury assuming a hot CPI, or, if it’s cool, could me a marginal mitigating factor for a hot CPI print or, in a best case scenario for markets, a rally accelerant if CPI is in-line or cool), traders will also get a look at retail sales figures for January.

Consensus is looking for a 1.7% gain in nominal spending. Retail sales came into January having fallen 1% or more for two consecutive months. The advance read on Q4 GDP showed consumption slowed late last year, as did the increase in revolving credit balances.

This is another example of America’s economic tightrope walk: Consumption needs to slow enough to help inflation fall, but not enough to tip the economy into recession. If you torture the y-axes, you can make the case that nominal sales are completely detached from payrolls, for whatever that’s worth.

“Retail sales could be the sneakiest source of risk for more of this ‘hawkish’ / ‘animal spirits’ move,” Nomura’s McElligott remarked, referencing the spate of hot data which pushed out a US recession and priced out hard landing risk in Q1.

Also on the docket this week in the world’s largest economy: NFIB, Empire manufacturing, the Philly Fed, claims, housing starts and Fed speakers including Barkin, Bowman, Bullard, Cook, Harker, Mester and Williams.

I’d note, in closing, that between hedging dynamics and the potential for systematic flows to play a role, the odds of fireworks this week are elevated+.