Market Analysis

US CPI Event Risk

Thursday’s US Consumer Price Index (CPI) will be a key data release this week, potentially affecting market pricing of expectations of Fed rate policy moves as well as the value of the US dollar. Previous CPI releases as reflected in the Citibank Inflation Surprise index for the United States have shown the data continuing to come in below forecasts. That may lend itself to a perception that traders will again expect the CPI to underwhelm. In terms of polls, a Reuters poll of economists is forecasting US CPI rose 0.3 per cent in August, which, having stripped out volatile food and energy components, suggests Core CPI will rise 1.6 per cent in August on a year-on-year basis, still substantially below the Fed’s 2 per cent target. Such an outcome would likely satisfy US dollar bears but traders might wish to be mindful of the fact that, if last Friday’s US Commodity Futures Trading Commission is a good guide, there is already an existing and very sizeable structural short US dollar position. If CPI prints above expectations, market positioning might have to adjust accordingly.

Perhaps that’s where the real event risk lies. US firm Morgan Stanley expects “headline US CPI to rise to 1.9 per cent year-on-year” compared to the prior print of 1.7 per cent and a consensus view of 1.8 per cent. But it also expects “core CPI to fall to 1.6 per cent year-on-year” in line with the Reuters poll. But one thing traders may wish to consider as they plan their strategies is that, as Morgan Stanley wrote.”the rise of commodity prices in August (CRB Rind +2 per cent) contributed to an upside surprise for the release of China’s CPI (1.8 per cent year-on-year) and PPI data (6.3 per cent year-on-year) over the weekend so markets will watch
to see if there is a global trend here.” Traders should note too that the Reuters poll was on the wire last week and so couldn’t have incorporated any economist reactions to the Chinese prints. Morgan Stanley’s ” US economists are also saying that some pass-through of USD weakness has helped ex-energy import prices and core goods PPI to turn higher this year, but there has been a limited impact on core goods so far.” Certainly the US dollar’s poor performance in August is now a matter of record. Traders may wish to approach Thursday’s US CPI data with an open mind.

Written by Neal Kimberley, External Currency Analyst.