Hello from Copenhagen.

It’s once again a sour start to the week as markets continue digesting the impact of the Trump administration’s inaugural policies on growth, prices, and sentiment in general.

We have witnessed how Trump has officially warned that the structural policy changes could normalize the economy in the short term—a very different tone from his first term. This likely signals that he will allow equities to turn further south in an attempt to secure political victories.

Powell, reacting to this, has stated that the Fed doesn’t need to adjust rates at this point, as navigating the current tariff environment is too difficult.

This is a prime example of what Trump risks doing to the economy: forcing the Fed into inaction even as the economy softens.

However, we still lean toward the Fed acting if the economy continues to weaken, especially if inflation starts softening—which is exactly what we are seeing across our tracked variables.

Since the US CPI report is the only major event this week, we will dedicate this piece to laying out all our thoughts—and, ultimately, why it could be the trigger for a more optimistic market environment going forward.

US CPI (Wednesday)

With markets digesting the ongoing US growth scare, attention has shifted toward the potential implications of tariffs on inflation.

At first glance, this might seem like another headache, but when digging into the details, the effects are far less concerning than they initially appear (see more in the latest edition of Steno Signals).

The big trend in inflation right now is that, while goods prices had previously made muted contributions, leaving shelter (which makes up >40% of the inflation basket) to drive CPI, we are now seeing a pick-up in cyclical prices.

This is why markets fear tariffs—as they naturally and directly increase goods prices.

The official economic consensus ahead of Wednesday’s print is 0.3% MoM for both core and headline CPI, while market-based inflation pricing (inflation fixings) expects a 0.37% print (which rounds to 0.4% MoM).

This means that even an in-line print would be positive for risk assets.

Additionally, some economists in the consensus are calling for 0.5% or even 0.9% MoM—clearly driven by tariff-based analysis.

Chart 1a: Tariffs Are Clearly Impacting the Inflation Narrative