March's inflation report will determine the success or failure of the market's rate cut forecasts.

• The March CPI report will determine the timing of this year's rate cut.

• After two firm CPI reports at the start of 2024, inflation is expected to cool in March.

• Here is a preview of market reaction to the March inflation data.

All eyes are on March's Consumer Price Index report, as it represents a key moment in the year for a possible rate cut.

The inflation report scheduled for Wednesday morning is expected to show that inflation will continue to cool following two firm reports in January and February.

The consensus view is that the core CPI will increase by 3.7% YoY, slightly lower than the previous month's 3.8%. The month-over-month core CPI is forecast to increase by 0.3% in March, compared to 0.4% in February.

Thierry Wizman, a strategist at Macquarie, argues that the ambiguity of different job market indicators means the CPI report is more important.

"It is precisely because the US labor market indicators are so ambiguous (strong hiring data, but weak hiring surveys) that the US inflation data become even more important as a driver of the Fed's policy outlook in the coming months," said Weissman.

With a potential rate cut hanging in the balance, "tomorrow's March CPI report will be critical," Wizman said.

Fed funds futures show that the market believes that the Fed's probability of a rate cut in June is about 50%, lower than the probability of a rate cut earlier this year nearly 70%.

Meghan Swiber, an interest rate strategist at Bank of America, expects inflation, as measured by the CPI, to fall in March, increasing the likelihood that the Fed will cut interest rates at its June policy meeting.

"We expect core CPI inflation to fall back to a monthly rate of 0.2% on the back of a slight decline in core goods prices and reduced pressure on core services prices," Swiber said in a note on Tuesday." If it materializes, the market may see a June rate cut as more likely, with the 10-year rate struggling to break above 4.50%."

JPMorgan's trading desk emphasized the importance of the March CPI report as it could largely influence the future movement of stocks and bonds.

"If the U.S. CPI moves sharply and unexpectedly higher or lower, then it seems most likely to further influence market action," Andrew Tyler and Ellen Wang of JPMorgan said in a report Tuesday.

According to JP Morgan, there are three possible scenarios based on the March CPI report.

1. CPI prints flat

In this context, JPMorgan expects the year-to-date trend to remain unchanged." That is, stocks are moving higher, led by Big Pan stocks, and as much as possible, we will likely continue to see further rotation in the broader cyclical/value stocks."

2. Extremely hot CPI prints

In this case, an overheated inflation report could trigger a "mini-repeat" in August-October, where inflationary fears lead to a sharp sell-off in stock prices.

"The lack of recessionary concerns and strong economic growth may limit the absolute magnitude of stock market declines," said JPMorgan." In this environment, we could see further rotation in sectors such as energy and materials."

3. Very cool CPI prints!

Stock market investors are likely to be most excited in this scenario, according to JPMorgan, as it "has the potential to lead to an accelerated move higher in the stock market."

"Areas likely to outperform include credit laggards, regional banks, renewable energy, and perhaps utilities and real estate. Additionally, if rate cuts are expected to come early 鈥竝hey could drive a steepening of the bull market, which would favor both cyclicals and value stocks. Small caps could also do better," JPMorgan said.

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