Market Analysis

Core Issues

“So Much Depends Upon Core US CPI,” wrote US firm Citibank in its Economics Weekly. As all will be revealed at 1330h (London time) on Friday, it might be worth taking the opportunity of taking an overview of what some analysts are expecting from the US inflation release for June. Citibank itself expects core CPI  “to increase from 1.7% to 1.8% Year on Year (y/y).” Italy’s Unicredit Research concurs with the view that US core CPI will tick up to 1.8 percent y/y but sees headline CPI falling to 1.8% from 1.9% y/y while Citibank sees it falling to 1.7%. Switzerland’s UBS concurs with Citibank’s view on headline US CPI but sees the core staying unchanged at 1.7% y/y. As for US bank Morgan Stanley, it sees both the core and headlines US CPI coming in at 1.7%. To put all this into context, these numbers matter because the market may well conclude that this data could inform Fed thinking going forward. “After three monthly downside misses on Core CPI, June’s release will be watched closely for evidence that softer inflation is only transitory,” wrote Citibank. Noting that “the market showed a limited reaction to wage growth in [last Friday’s US] jobs report” Citibank nevertheless feels that “surprises to core [US] CPI [on July 14] are likely to lead to some repricing of Fed policy.” In a nutshell, Citibank contends “a fourth consecutive downside miss would make it difficult to claim the slowing in price inflation is “transitory.” On the other hand, faster than expected inflation would increase the probability of a third 2017 rate hike.” Currency traders may decide Friday’s US inflation data is a core issue.

Written by Neal Kimberley, External Currency Analyst.