Alert! The overheated US CPI data may shift the stock market from "Risk-On" frenzy towards a trajectory of short-term selling.

According to the latest predictions of Wall Street strategists, a too hot US CPI data report could trigger a significant market turn - particularly if the CPI is significantly higher than expected, the market may shift from "the Fed pausing rate cuts this year" to "the Fed may have to reconsider raising rates," which also means that the dovish optimism supporting the market's Risk-On (i.e. "fully embracing risk assets") and bullish assumptions may be shattered. The global stock, bond, and currency markets may enter a more intense repricing phase, especially for the global stock market bull market driven by AI computing power trading under the backdrop of increased risk appetite, meaning a significant downward trend in the short term. Although the US stock market and even the global stock market has recently hit record highs driven by strong US non-farm employment and an unprecedented investment frenzy in AI computing power, market momentum trading has become increasingly extreme, with oil price shocks, inflation concerns, and rising long-term US bond yields emerging as key variables suppressing valuations. In particular, the 10-year US bond yield is forming a technical pattern that could further rise, and if the yield continues to break through, it could threaten the stock market uptrend. Furthermore, the latest geopolitical developments - namely, Trump's rejection of Iran's peace proposal, has undoubtedly extended the crucial blockade of the Hormuz Strait, which is vital for the global energy system. This may lead to further increase in international oil prices, and combined with extreme levels of momentum trading indicators that have historically indicated sharp sell-offs in the short term, it may lead to a significant correction in the recent surge of global stock markets under the frenzy of AI investments. US inflation is heating up again, primarily due to the sharp rise in international oil prices by over 60% since the end of February, and major central banks around the world, including the Federal Reserve, are approaching a point where they may need to take action. Currently, the interest rate futures market's view of the Fed is to maintain the status quo, and at least until the end of this year, no signals of rate cuts are expected. At the same time, the European Central Bank, Bank of Japan, and Bank of England are likely to need to start tightening policies soon. This is not just about central bank policies. The interrelation between the global stock market driven by the AI computing power frenzy, the US Treasury bond yields which are considered the "anchor of global asset pricing," and the US dollar index is significant. The latest US CPI data report for April will undoubtedly play a crucial role in determining their next moves. The CPI storm is approaching! High oil prices may ignite the inflation beast It is expected that the April CPI will be hot again, with economists unanimously predicting a significant monthly increase of 0.6%, compared to the previous month's 0.9% rise in March. This is expected to push the CPI year-on-year from 3.3% in the previous month to a significant rise to 3.7%. At the same time, the core CPI is also expected to see a significant jump, with the month-on-month change possibly rising from 0.2% to 0.4%, and the core CPI year-on-year possibly rising from 2.6% to 2.7%. Kalshi and others predict that the market also agrees with analysts' expectations, forecasting a year-on-year increase of 3.7% for CPI and a month-on-month increase of 0.6%, while core CPI is expected to increase year-on-year by 2.7% and month-on-month by 0.4%. The issue is that the May inflation rate is expected to further rise on a strong April inflation basis; currently, the CPI swap market is pricing in an overall CPI increase to 4%. It is worth noting that the US inflation data for March has already shown a hot trend, with the CPI rising by 0.9% month-on-month, marking the largest monthly increase since June 2022; and the year-on-year increase to 3.3%, reaching the highest level since 2024. The gasoline surge even set a record high since 1967. This (continuing rise in CPI data) will undoubtedly pose a major challenge for the Federal Reserve and global central banks, and may put more pressure on them to take action towards tightening monetary policy following the miscalculations of inflation predictions in 2021 and 2022. The market has already reacted, with the federal funds futures market pricing in that the Fed will not choose to cut rates until 2026, and there will be no rate cuts in the foreseeable future. These challenges not only exist for the Federal Reserve but also for other major central banks such as the European Central Bank and the Bank of England, as the high inflation threat has forced rate futures market as well as bond trading market to quickly adapt to the oil supply shock. Since the start of the Iran conflict at the end of February, the Hormuz Strait has essentially been in a state of blockade, cutting off one of the most crucial shipping lanes for supplying crude oil, natural gas, and refined oil products to global customers, significantly raising energy prices and intensifying global investors' concerns about inflation. The International Energy Agency has stated that the supply disruptions caused by the geopolitical conflict in the Hormuz Strait are causing the largest supply shock in human history. Financial giant Citigroup on Wall Street released a research report stating that if long-term and difficult peace talks between the United States and Iran lead to a prolonged state of blockade and control in the Hormuz Strait, the international oil benchmark - Brent crude oil prices may further rise from the recent significant drop near $100 points and may even reach a new temporary high. The market has begun to price in the possibility of rate hikes in Europe, with the European Central Bank and Bank of England likely to raise rates up to three times this year. Meanwhile, the market has not yet priced in Fed rate hikes, only pricing in the end of the easing cycle. Even with accelerated expansion of CPI, the bond market is relatively calm in digesting this, pricing in risks based on higher inflation expectations rather than higher actual returns - meaning the market still expects the Fed to have a dovish rate-cutting bias, as some economists continue to see oil price shocks as "temporary." Since the sharp increase in international oil prices by over 60% at the end of February, the 10-year US TIPS real yield curve has actually declined in the past few months, while the 5-year inflation swap has increased significantly. All of these make the April CPI report especially important, as a lower-than-expected report may prompt the market to reconsider the Fed's rate-cutting trajectory, while a reading significantly higher than market expectations may lead to rate pricing and challenge the market's optimistic bullish view of the Fed's dovishness. Additionally, CPI may continue to have a significant impact on the trend of the US dollar exchange rate and US Treasury bond yields. The 10-year US bond yield is approaching a crucial potential position to break through a long-term downward trendline, which has been tested repeatedly. If the 10-year US bond yield curve continues to break through the technical trendline and exceeds 4.4%, it may trigger a sustained significant increase in the 10-year yield for months, and may even push the yield back to the historic levels seen in October 2023. The US dollar index, which is a benchmark for measuring the strength of the US dollar, is no exception. The US dollar index has struggled to break through the crucial resistance level of 101, but in recent weeks has formed an upward trend; if it breaks through the 101 resistance level, the dollar may move towards the highest level since January 2025, around 109 points. At present, interest rates and the dollar are at crucial levels on the technical chart. If both the US dollar and the 10-year US bond yield continue to break through after the CPI report, it could be a major red sell-off warning signal from the market, which would be hard for Fed policymakers and investors to ignore. If the 10-year US Treasury bond yield and the dollar continue to fluctuate in a range, the market will remain neutral for a longer period, or at least will continue to watch until the next CPI report in June. And during this period, if there are major positive catalysts related to AI that intensify, it may push the US stock market and even the global stock market to further achieve new record highs in a bull market frenzy. CPI becomes the "master switch" of the three markets! A hot CPI report may pull the market back from Risk-On to the "high yield, high US dollar exchange rate, high volatility" era A too hot US CPI inflation report may force the market to re-evaluate the Fed's reaction function. If the CPI is significantly higher than expected, the market may shift from "no rate cut for the time being" to "repricing rate hike risks," driving the 10-year US Treasury bond yield and the US dollar to break through key technical levels, which could then lead global risk asset prices from Risk-On to a temporary and drastic sell-off market. For the bond market, the direct implication of the hot CPI is: the long-end nominal yields will rise, the inflation compensation will increase, and the 10-year US bond yield curve may continue to break higher. If the market believes that the Fed will see through the oil price shock and that real yields will not rise significantly, the actual yield may not rise significantly; but if the heat of the CPI spreads to core inflation, wages, and service prices, the bond market will have to shift from "one-time oil price shock" to "more persistent inflation shock", in which case real yields will also rise, and the 10-year US bond may retest higher ranges. Recent research by Barlays Bank, a Wall Street financial giant, has revised its forecast for a Fed rate cut in 2026 to 2027; and traders in the interest rate futures market recently priced in a probability of approximately 78.7% that rates will remain unchanged until the end of 2026, indicating that the bond market has significantly weakened the "rate cut dream." If the yields of the 10-year and longer-term US Treasury bonds continue to rise, for core risk assets such as the stock market, cryptocurrencies, and high yield corporate bonds, this means "significant increase in cost of capital + weakening liquidity expectations + expanding macro denominator" happening simultaneously. In theory, the 10-year US Treasury bond yield is equivalent to the risk-free rate indicator 'r' at the denominator end of the discounted cash flow (DCF) valuation model, an important valuation model in the stock market. When other indicators (especially revenue expectations at the numerator end) do not change significantly - such as during a financial reporting season when the numerator is in a vacuum due to the lack of positive catalysts - at this time, if the denominator level is higher or operating at historically high levels, those high valuation tech stocks, high-yield corporate bonds, and cryptocurrencies closely related to AI will face a collapse in valuation. For the foreign exchange market, the too hot CPI is undoubtedly very bullish for the US dollar, especially when the US yields are back on the rise and other economies are facing more fragile growth. The underlying logic behind this is that - if US inflation heats up again but the economy remains resilient, the Fed maintains high rates or even sends a more hawkish signal, it will widen the US dollar's relative interest rate advantage; meanwhile, geopolitical conflicts and oil price shocks will also reinforce the demand for safe-haven dollar. If the US dollar index breaks through 101, it can open up technical space for a rise back to around 109, which is consistent with the current trading pattern faced by energy-importing economies like Japan and South Korea due to oil price shocks and greater pressure on their currency reserves. For the stock market, a too hot CPI doesn't simply mean "bearish everything," but rather it will change the market's internal structure. If the CPI is slightly hot, overall valuations of US stocks will be curbed by a higher discount rate, especially for high-duration growth stocks that are not yet profitable, AI-driven popular momentum stocks, and the most crowded part of the semiconductor sector; whereas energy, oil services, inflation hedging, and value stocks with strong cash flow and pricing power will be relatively advantaged. If the CPI is mainly driven by energy and core inflation remains moderate and below expectations, the market may continue to bet on "profit upgrades driven by the AI computing infrastructure frenzy + economic resilience" to offset downward pressure, which means that the bullish trend and main trend of the global stock market driven by AI will remain intact for the time being; but if core CPI also rises significantly, the market will shift from a "profit-driven bull market" to a more complex pricing environment of "yield curve pressure on valuations + inflation eroding profit margins."