CPI (the Consumer Price Index) has been the most relevant economic report on the horizon since the balmy NFP report from 2 weeks back. Reason being: NFP contained a strong wage growth component, and that always generates some fear among bond traders that higher wages will translate to higher inflation. Economists aren’t exactly expecting a big uptick in tomorrow’s CPI data, but that’s precisely why it’s been something of a risk.
In other words, if CPI were to come in much stronger than expected tomorrow morning, it could dampen spirits in the bond market. Of course CPI could always come in weaker too–which would cast even more doubt on the ability of wages to translate to inflation in the current economic cycle. It’s not that it hasn’t been happening, just that it hasn’t been happening as fast as it used to.
Then there’s the matter of third variables. For instance, yesterday and today’s stock losses seem to have gone a long way toward getting the bond market in a more optimistic stance heading into tomorrow. If CPI doesn’t carry big implications (i.e. no big beat or miss), it could be stocks–once again–that set the tone.