The US CPI report for September will be released tomorrow at 8:30 AM ET. The report – along with the PPI on Thursday – will give traders another key piece of the inflation puzzle as markets assess whether the Fed will need to tighten policy further. Number crunchers will also be able to get a handle on the PCE and Core PCE from both readings.
The expectations are seeing:
Headline CPI month over month: +0.6% expected versus +0.4% last month.
Headline CPI year over year: +3.6% expected versus +3.4% last month.
Core CPI month over month: +0.2% expected versus +0.3% last month.
Core CPI year over year: +2.5% expected versus +2.4% last month.
The core numbers will be the focus. A 0.1% MoM (or better) core and 2.4% (or better) YoY would be moving in the right direction. .
The key question: How far are energy costs spreading?
Higher energy prices are expected to drive the stronger headline reading.
The more important question for the broader inflation outlook is whether those costs are filtering into other goods and services. That puts the core reading—which excludes food and energy—firmly in focus.
Last month, gasoline prices rose 3.9%, accounting for more than one-third of the monthly headline increase. However, core prices also rose 0.3%, with increases in categories including airline fares, lodging and used vehicles. Traders will be watching whether those underlying pressures ease in September.
A 0.2% monthly core reading would represent a slowdown from August, even if the annual rate edges higher. Those two measures can move in different directions because the annual comparison also depends on the reading from a year ago.
What could it mean for markets?
My read is that the core surprise will be an important driver of the reaction:
Hotter core inflation: A reading of 0.3% or higher could lift Treasury yields and support the dollar as traders reassess the risk of further Fed tightening. I am leaning that a October hike – although it may be needed – is odds on a no go for political purposes. The Fed will let the market do the tightening for them and remain out of the hot seat (it is just the way it is with Trump as President).
Core in line at 0.2%: That could give the Fed more room to wait, particularly if the headline increase is concentrated in energy.
Softer core inflation: A reading of 0.1% or lower could pressure yields and the dollar and provide some relief for stocks. Although December may still be on the table (one more hike), the chance for October works closer toward 0% from about 20% currently.
For currency traders, the data will provide the shove. The technical levels will help tell us whether buyers or sellers can keep control after that initial move.
Watch where the price trades relative to the pre-release range, nearby swing levels and the 100- and 200-hour moving averages. A break that holds carries more weight. A break that quickly reverses tells us the market had its shot—and could not follow through.
This article was written by Greg Michalowski at investinglive.com.
