I am going into tomorrow's CPI report with a neutral-to-slightly-bearish bias on equities, but not with a crash thesis.
My base case is that August CPI comes in very close to consensus: approximately +0.4% month-over-month and +3.4% year-over-year, with core CPI around +0.2% to +0.3% month-over-month and approximately +2.4% year-over-year. The current consensus is 3.4% headline and 2.4% core, while several nowcasts are clustered around essentially the same numbers.
So I am not expecting a dramatically hot CPI print. But I also do not expect a sufficiently cold number to immediately reverse the recent deterioration in bonds and equities.
That distinction is important.
The inflation picture has become increasingly two-sided. On one hand, the underlying components of core inflation appear to be moderating. Shelter inflation is slowing, and some of the more persistent services components are no longer accelerating at the rate we saw earlier in the year. Goldman Sachs, for example, expects only a 0.23% monthly increase in core CPI, which would leave the year-over-year rate at approximately 2.4%.
On the other hand, the energy shock has changed the inflation backdrop.
Oil has moved sharply higher as the Iran conflict disrupts energy flows, with Brent recently trading above $107 and U.S. crude settling above $100. That is beginning to work its way through producer prices and ultimately into consumer prices. August PPI rose 0.4% month-over-month and 5.4% year-over-year, while energy prices were a significant contributor.
Therefore, I expect tomorrow's report to tell us something like this:
Underlying inflation is not exploding, but the disinflation process is no longer proceeding cleanly.
That is a much more important message for investors than whether headline CPI prints 3.4% or 3.5%.
My CPI call
If I had to put specific numbers on it tonight, my central forecast would be:
Headline CPI: +0.4% MoM
Headline CPI: +3.4% YoY
Core CPI: +0.2% to +0.3% MoM
Core CPI: +2.4% YoY
I would assign the highest probability to a roughly consensus report rather than an upside or downside surprise.
But I would define the market's danger zones differently.
A 0.2% core CPI would probably be interpreted as a relief number.
A 0.3% core CPI would probably be interpreted as mildly hot.
A 0.4% or higher core CPI would be a materially bearish surprise because it would reinforce the argument that inflation is becoming sticky again precisely when the energy shock is intensifying.
Conversely, a 0.1% core CPI would be the kind of number capable of producing a significant relief rally.
Why I am not expecting a major CPI-driven collapse as my base case
The stock market has already done some of the work.
The S&P 500 has now declined for four consecutive sessions and is down approximately 2% over those four sessions and nearly 3% from its August record high. The Nasdaq has also declined roughly 1.6% for the week.
At the same time, the 10-year Treasury yield has climbed to approximately 4.95%, while the 30-year yield has moved above 5.3%. Those are extremely important developments because the equity market is being hit simultaneously through valuation and financing costs.
In other words, the market has already been discounting a hotter inflation environment.
That makes me reluctant to forecast a straightforward continuation of the recent selloff unless CPI actually surprises to the upside.
The market is increasingly trading the risk of inflation, rather than simply trading the actual inflation data.
What I expect the market to do tomorrow
My base case is initial volatility followed by a modest relief rally if core CPI comes in at 0.2%.
If we get approximately:
3.4% headline / 2.4% core
I would expect the initial reaction to be positive because investors can say, "The inflation data did not get materially worse."
I would not, however, expect that to automatically produce a major upside breakout.
Why?
Because the market still has three enormous problems sitting behind the CPI number:
Oil above $100
The 10-year Treasury approaching 5%
A materially more hawkish Fed pricing environment
The market is now assigning roughly a 70% probability to a Fed hike next week, according to current market pricing reported today.
Therefore, even a perfectly ordinary CPI report may produce only a relief rally rather than a new bull leg.
My approximate market map would be:
| CPI outcome | My expected equity reaction |
|---|---|
| Core 0.1% | Strong rally |
| Core 0.2% | Moderate relief rally |
| Core 0.3% | Choppy / modestly lower |
| Core 0.4%+ | Sharp selloff / possible cascade |
The important variable is therefore not the 3.4% headline number. It is the monthly core number and, underneath that, whether the report shows broadening inflation outside energy.
My larger concern is what happens after tomorrow
I think investors should be careful about treating tomorrow's CPI as the entire story.
The report I have been reviewing describes a much broader regime shift: energy disruption, fiscal pressure, rising sovereign yields, tighter monetary policy, increasing AI capital intensity and greater use of debt and private credit to finance investment.
That combination is considerably more consequential than one CPI print.
The most concerning development to me is actually the bond market.
If CPI is benign but the 10-year Treasury still refuses to fall materially below 4.8%-4.9%, I would interpret that as a warning that the market is demanding a higher term premium because of fiscal, inflation and supply concerns.
That would mean the equity market's problem is becoming structural rather than simply data-dependent.
Conversely, if CPI is benign and the 10-year yield falls meaningfully, I would become substantially more constructive on equities.
That combination would tell me that the recent selloff was primarily a positioning and inflation scare rather than the beginning of a deeper valuation reset.
My equity-market forecast
My probability-weighted view is therefore:
Most likely: stabilization followed by a modest recovery.
I would put the scenarios roughly as follows:
50% — Relief/stabilization:
CPI comes in around expectations, core remains near 0.2%, Treasury yields retreat somewhat, and the S&P 500 stages a relief rally. This would be my base case.
30% — Continued downward drift:
CPI is technically close to expectations but the market focuses on oil, Treasury yields and the Fed. Stocks bounce initially but fail to hold the gains. This is the second-most likely outcome.
15% — Meaningful downside/cascade:
Core CPI prints 0.3%-0.4% or higher, yields surge toward or above 5%, and the market concludes that the Fed cannot ease and may actually need to tighten. In that scenario, I would expect a much more aggressive equity selloff, particularly in long-duration technology and highly valued AI names.
5% — Strong upside breakout:
Core CPI comes in at 0.1% or similarly soft, Treasury yields collapse, and the market suddenly prices out much of the Fed-hike risk. That could generate a powerful rebound because positioning has already become defensive.
My conclusion
I am not expecting a CPI disaster tomorrow.
My expectation is for a roughly consensus headline CPI around 3.4% and core around 2.4%, with the monthly core reading being the critical number.
But I am also not prepared to declare that the recent equity weakness is over.
The market has entered a much more difficult macro regime. The report I reviewed describes the underlying dynamic well: geopolitical risk is raising energy costs at precisely the same time that fiscal constraints, elevated sovereign yields and tighter monetary policy are reducing the economy's ability to absorb the shock.
That is why I view tomorrow as a decision point rather than necessarily a turning point.
If CPI is benign and the 10-year yield retreats, I expect the recent 2%-3% equity decline to produce a tradable recovery.
If CPI is merely in line but yields remain elevated, I expect continued sideways-to-downward drift.
And if core CPI surprises materially higher, I would become concerned that the market is entering a genuine second leg lower, because the combination of higher oil, higher inflation expectations and a 5% Treasury yield would create a very different valuation environment for equities.
For that reason, my base case tonight is:
CPI: neutral to slightly hot.
Stocks: initial relief likely, but probably not a major breakout.
Bonds: still the key market to watch.
Overall equity bias: neutral-to-slightly bearish until Treasury yields demonstrate that they can actually come back down.
The biggest bullish signal tomorrow would therefore not simply be a "good" CPI number.
It would be a good CPI number accompanied by a falling 10-year yield.
That is the combination I would want to see before becoming substantially more bullish on SPY, Nasdaq and other duration-sensitive assets.