Financial markets may hinge on the U.S. inflation readings due later this week, according to strategists at Wolfe Research. The firm warned that the release of May consumer prices could be a decisive factor for equities, particularly while oil remains elevated and geopolitical tensions linger.
Wolfe Research framed the situation starkly:
and added that"In the absence of a resolution between the U.S. and Iran, we believe that hotter-than-expected inflation is likely to be a negative catalyst for stocks and could spark a near-term selloff in indices,"
"Markets are indeed moving closer to the fork in the road depending on the direction of oil prices."
The consumer price index for May is scheduled for release on Wednesday. Analysts are forecasting the headline CPI to accelerate to 4.2% year-on-year, up from 3.8% in the prior month. On a monthly basis, CPI is expected to slow to 0.3% from 0.6%.
Measured without food and fuel, core CPI is seen picking up pace to 2.9% year-on-year and 0.5% month-on-month. Separately, the producer price index is projected to moderate to 0.7% month-on-month from 1.4%, while core PPI is forecast to cool to 0.5% from 1.0%.
Those readings come against a backdrop of renewed attention to the Middle East. Media reports on Monday said Iran and Israel have halted attacks on one another for now but appeared to leave the door open to further hostilities. The reports followed renewed strikes between the two countries that, the strategists noted, have injected uncertainty into oil markets and broader market sentiment.
Wolfe Research highlighted the geopolitical element as integral to how inflation data could be interpreted. If oil prices climb further as a result of escalating tensions, that could translate into higher energy costs and renewed inflationary pressure. Brent crude, the global benchmark, pared earlier gains and has settled below recent peaks, yet remains well above pre-war levels.
Markets are also digesting strong U.S. employment data released last week. Combined with the elevated oil backdrop, that strength in the labor market has fed expectations that the Federal Reserve may raise rates by the end of the year.
"U.S. markets are shifting into a more hyper-sensitive mode with respect to inflation and employment trends as oil prices remain high," the Wolfe analysts wrote.
They added a caveat on potential market trajectory beyond this week's data:
"If markets move past this week's inflation data without any negative surprises, news flow will likely shift back to AI and SpaceX's planned IPO which should revive animal spirits once again."
Outlook: Investors will watch the May CPI and accompanying PPI figures closely for any signs that inflation is accelerating or easing. The readings will be assessed not only on their own merits but also for how they interact with oil-price movements and geopolitical developments in the Middle East, which together could shape expectations for interest rates and equity market direction.