Softer CPI print increases the possibility of rate cuts by providing the Fed with the flexibility & reassurance needed to shift focus from fighting inflation to supporting labor market. There will be few major factors behind this: (1) Probability Shift where people have bet for a June cut, with probabilities as high as 83% to 90% (2) Timing: a March cut remains highly unlikely due to a still-strong labor market, the disinflation trend keeps this likely for H2 2026 (3) Qquantum of cuts: Markets now price in approximately 63 basis points of total easing for 2026, equivalent to about two to three quarter-point reductions by year-end. (4) how markets react: S&P 500 and other major indices initially rallied on the news, as lower inflation and the prospect of cheaper borrowing costs are generally bullish for equities (5) Sector Performance: The cooling print particularly supports interest-rate-sensitive sectors such as Real Estate (REITs) and Small Caps, while cyclicals continue to find favour (6) Sustained Gains: combo of moderating inflation and a robust labor market (the "soft landing" narrative) supports further stock market growth in 2026. (7) Risks: Sticky service inflation (which rose 0.4% MoM) and firming core inflation could still prompt a cautious, slower-than-hoped response from the Fed, which might temper extended gains.
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