Expected Slowdown In US CPI Unlikely To Derail Fed Rate Path

My FX Forum

Staff member
US inflation data as gauged by the consumer price index (CPI) will be made public on Thursday at 1230 GMT. Headline CPI growth is expected to ease to its lowest since March on a yearly basis, though combined with the rise in underlying price pressures as measured by the core CPI, that’s unlikely to pose any threats to the Federal Reserve’s rate normalization plans. Still, the dollar is likely to prove sensitive to deviations from analysts’ forecasts, with the release constituting the most important one out of the US for the week.

September’s CPI is anticipated to grow by 0.2% on a monthly basis, the same as in August. This would put the annual rate of growth in the measure at the six-month low of 2.4%. Still, this would keep the print at relatively elevated levels. Overall and adding to this the projected rise in core CPI to 2.3% y/y from 2.2%, the annual slowdown in headline CPI is unlikely to be seen as threatening the Fed’s rate outlook. Core inflation is the reading that excludes volatile food and energy items from its calculations.

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Energy prices supported headline CPI in August, with falling healthcare and apparel costs acting as a drag on the gauge, which tracked an annual pace of expansion of 2.7% during the month.

For the record, the US central bank’s preferred indicator of price pressures is the core PCE price index, which during August stood at 2.0% y/y for the fourth straight month, coinciding with the Fed’s annual target for inflation. Still, consumer price inflation is also closely watched, as a beat in the figures is likely to be met with rising odds for a fourth 25bps rate rise in 2018 (79% priced in according to Fed fund futures), resulting in long dollar positioning. Conversely, weaker-than-expected prints are likely to weigh on the greenback. Of course, the extent of the discrepancy from economists’ projections will determine how volatile markets will be in the aftermath of the data; the two are positively correlated.

Technically, a rising USDJPY that conclusively moves above a previous peak at 113.16 may meet resistance around the 114 round figure which halted advances in previous occasions. In case of an upside violation, the attention would turn to last week’s 11-month high of 114.54, while further above, the 115 handle would come into scope. On the downside, a declining pair could find support from the region around 111.82, which is another top from the past; the 50-day moving average roughly coincides with this point as well. Lower still, the focus would turn to the 100-day MA at 111.23.

It bears mention, perhaps more so at this point in time that Fed policymakers appear more confident in hiking interest rates, that the numbers are anticipated to affect bond and equity markets as well. The readings overshooting expectations are supportive of higher yields and consequently lower stock market valuations, as the borrowing costs of corporations would be facing upside pressures. In this respect, two-year and 10-year Treasury yields reaching fresh highs last week – they extended their move up during the current week – sent shivers across stock markets, with the Dow Jones, S&P 500 and Nasdaq Composite all posting weekly losses.

On the Fed front, numerous FOMC members will be making public appearances as the week unfolds. Evans (non-voting FOMC member in 2018 – 1415 GMT) and Bostic (voter – 2100 GMT) are on the agenda on Wednesday. The two will return to the rostrum on Friday at 1330 GMT and 1545 GMT respectively.

Lastly, the producer price index (PPI) that measures factory inflation is due at 1230 GMT later today. Traders may use these figures to speculate on how the CPI numbers will be released, though it should be stressed that the two gauges (PPI & CPI) are far from perfectly correlated.