Following Friday’s surprising payroll jobs release, the world will now be watching inflation data on Wednesday. The August 12 CPI is the first of five inflation releases due ahead of the FOMC meeting in September and the result could be decisive in determining if the Fed tightens interest rates further.
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What To Expect
BLS data release Wednesday Aug. 12 at 8:30 AM ET. The Cleveland Fed’s estimate expects headline CPI of 3.32% versus June 3.50%, while the Cleveland Fed is forecasting Core PCE (the Fed's preferred inflation metric) to rebound to 3.36% for the July print.
Metric Previous July Est. Change
CPI (y/y) 3.50% 3.30% -20 bps
Core CPI (y/y) 2.60% 2.50% -10 bps
CPI (m/m) -0.40% ~0.20% +60 bps
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Why Now
Friday’s jobs report showed a surprising negative 23,000 jobs change for payrolls versus an expected positive 80,000 jobs change. Some analysts are seeing the data as an excuse for the Fed to avoid rate hikes, but inflation will be the deciding factor. “Even in a cooling job market, [if inflation surprises higher] these inflation results might not stop some folks on our staff screaming to go hike,” warns Morgan Stanley’s Ellen Zentner.
The wild card here will be the impact of a oil price shock following recent supply restrictions from Iran.
The Cleveland Fed’s own forecast of Core PCE moving back to 3.36% in July should be a warning of inflationary pressures.
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The Three Scenarios:
Goldilocks Scenario: 3.2-3.3% Yo Y and Core flat, then…USD down, Gold up near $4,300+, Fed rate pause odds above 50%.
Hot Scenario: Above 3.5% Yo Y and Core rising, then…USD rallies, Gold down near support of $4,000, and Fed rate hike odds will exceed 50%.
Cold Scenario: Below 3.0%YoY and Core falling, then…USD down toward 98, Gold rallies above $4,200 possibly challenging $4,300+, and risk assets rally.
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What To Look For
Instead of the headline figure, the key will be the surprise. Watch carefully for developments in these three areas:
Core Inflation: Beyond headline, core measures of inflation should gain significant focus for Fed traders.
Supercore Inflation (Services ex-shelter): Sticky costs as related to employment could keep inflation pressures from the service sector very elevated.
Used Vehicle & Airline Ticket Prices: Temporary shocks in this sector can distort price data.
The September clock: In addition to the CPI release next Wednesday, traders will follow data on PPI on Aug. 13, and then PCE on August 26 (along with two further inflation releases) for the Sept. 15–16 Federal Open Market Committee meeting. Fed funds futures are pricing in a 55.9% chance the Fed doesn’t change interest rates in Sept..
Manage your expectations accordingly, and follow the data,.
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