Everything seems to have shifted to watching this Wednesday's release of the Consumer Price Index (CPI) data. The reports comes at a precarious time as the market is split on whether the Fed will actually hike in September.
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What the Latest Figures Show
This Wednesday at 8:30 am ET (12:30 pm GMT), the Bureau of Labor Statistics will release the July CPI figures. This according to The Cleveland Fed’s Inflation Nowcasting tools is going to show only moderate inflation deceleration-expected to moderate for headline inflation to 3.42% year on year for July. While the outlook shows that some moderation is expected in month-on-month inflation too and may fall to as low as of .342 from last month of 3.5%. But Core inflation remains stickier, remaining close to August's figures at 3.31%.
Index Jun-MoM Jun-Yoy Jul-MOM Forecast Jul-YOY Forecast Core CPI (Jul) YoY 2.9 2.6 3.3
The June data for CPI (MoM) was –.4%. The lowest readings since May 2020. For the last headlineCPI(YOY) came in just at 3.5% from previous 4.2%, and core CPI has been flat since the beginning of July to 2.6%. --- Why is this Report Important Now Last Friday’s Jobs Report saw a surprise July July decrease of 20,000 non-farm payrolls instead of the estimated 83,000 gain.
The previous two months job numbers June and May data showed a decline from estimate.
But the latest inflation data report this week could very well be important since last Friday, Fed Chair Kevin Warsh declared his stance on price stability “...no appetite or tolerance for the current level of persistent inflation…” Even although he welcomed the more recently reported softer CPI and PPI prices numbers, He still stated to the masses that one Month of soft print will definitely not bring enough information for the Fed to change its direction… ”we would need to see a sufficiently sustained series of prints showing moderating inflation before… it's necessary to consider any policy reassurances" added Warsh Christopher Zaccarelli, CIO for Northlight Asset Management suggests “all eyes now are focused on the CPI release that we get on Wednesday. If inflation comes in stronger than is already anticipated, it would increase the likelihood of the Fed raising rates at the upcoming September meeting … the weak number last Friday the Fed may likely keep rate at its next policy decision, however that could quickly change if inflation prints higher than what has been reported in the news.” Where are the warning signals The problem we have with the Cleveland Fed Inflation Nowcasting Aug forecast is that it looks like this,headline inflation has dropped a full point From May-however that has coincided with a stable rate of core and that August’s forecast 3.31 to August forecast of 3.36 suggests that theIran– war inflation may finally get deeply embedded and stick in the economy “The biggest challenge this time compared to other cycles is how deeply entrenched, or how much of Iran war induced inflation we’ll see” added Zaccarelli “The sticky nature of core inflation over the last 1-2 months suggest it will be more stubborn than one would usually assume going into this inflationary trend".
Market implication on this weeks’ results:
The Fed Dollars: after the July Payroll shock Dollar Index(DXY) has begun to drop and a weaker headline and core CPI number would probably have another round of dollar sell off, breaking further down to the 98.60 to 98.00 level.A stronger print may push DXY back up toward the 101.80 to102.00 area.
Gold: has currently settled above 4200 in recent rally weeks, a weaker reading on CPI would increase more buyers as “it sets the table to push gold to further 4,400 and upward prices, while a harder read of the July data might provide opportunity for dollar longs by sending prices to the $4000 level”.
EUR / Dollar: Expect to continue trading in a range of 1.150 – 1.155 until the release, so expect more dollars outflow leading into more EUR gains past 1.16. USD/YEN is expected to be the most reactive G10 currencies as markets are in the process to rebuilding USD shorts after repeated intervention.
How to Play the CPI Data? The real volatile engine for this pair is usually the size of the gap when this week results came out as the markets has “already pricing” moderating level of CPI number. It can be all thrown out the door depending on how much of deviation will be noticed. Keep this as key: Core CPI( not headline ) it is used more by FED Reserve; Services inflation ; Last Month Rev data Can give indication how fast the inflation went in different sectors of the economy Take caution while trading any pairs as spread may extend and slippage would occur; Most trader put no more than a quarter to a half percent of there equity when trading on such economic Data days.
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