Tomorrow at 1:30 pm GMT we have not one, but TWO top-tier U.S. reports on tap. Think you’re ready to make pips from the event? Here are a few points to note:
U.S. CPI Report (October)
What happened last time?
- Headline CPI (m/m): +0.5% vs. +0.6% expected
- Core CPI (m/m): +0.1% vs. +0.2% expected
- Headline CPI (y/y): +2.2% vs. +2.3% expected
- Core CPI (y/y): +1.7% vs. +1.8% expected
Headline consumer prices rose by 0.5% in September, which is higher than August’s 0.4% uptick and is the biggest gain since January. On an annualized basis, prices rose by another 2.2%, which may have missed 2.3% expectations but still marked the highest inflation rate since April.
Analysts weren’t impressed, however. As in the previous month, it was gasoline index that pushed prices higher.
See, it grew by another 13.1% from a year earlier in September after hurricane-related concerns already pushed to an annualized rate of 10.4% in August. That’s about three-fourths of the overall price increase! Other components actually showed mixed growth.
Prices don’t look any better even if we remove food and energy components. Core CPI clocked in a 0.1% growth, which is lower than the expected 0.2% uptick. On an annualized basis, prices actually retained its 1.7% growth for a fifth month in a row. Yikes!
The shelter index – which accounts for a third of core prices – rose by another 0.3% after gaining 0.5% in August. Motor vehicle insurance (+0.5%), education (+0.3%), wireless telephone services (+0.4%), and alcoholic beverages, personal care, and tobacco also increased while medical care (-0.1%), new vehicles (-0.4%), and apparel (-0.1%) showed declines.
What’s expected this time?
- Headline CPI (m/m): +0.1% vs. +0.5% previous
- Core CPI (m/m): +0.2% vs. +0.1% previous
- Headline CPI (y/y): +2.0% vs. +2.2% previous
- Core CPI (y/y): +1.7 as in September
As you can see, analysts estimate a lower monthly headline reading but a slightly faster core inflation rate for October.
Will these estimates hit the mark? Let’s take a look at leading indicators for clues.
The price component of ISM’s manufacturing PMI report increased at a slower rate in October, dipping by 3 points to 68.5 after rocketing to 71.5 in September. Ditto for ISM’s non-manufacturing PMI, which fell by 3.6 points to 62.7.
Respondents continue to point to hurricane-related disruptions, saying that they have caused inventory constraints and operating inefficiencies that contribute to higher raw material prices.
Even Markit is signalling slower price increases in October. “Shortages stemming from supply chain disruption after the recent hurricanes” still affected manufacturing prices, but input prices for services “dropped markedly” as the impact of said disruptions eased.
Looking at historical tendencies, there were only two instances of upside surprises for the headline reading during the last 10 years since market estimates either hit their mark or were too optimistic and overshot their guesstimates, resulting in downside surprises.
The core estimates, meanwhile, also had only better-than-expected readings twice in 10 years but market analysts tend to get hit their mark more often than not . Not exactly encouraging, is it?
U.S. Retail Sales Report (October)
What happened last time?
- September’s headline retail sales (m/m): +1.6% vs. +1.7% expected
- September’s core retail sales (m/m): +1.0% vs. +0.5% expected
- August’s headline retail sales revised higher from -0.2% to -0.1%
- August’s core retail sales revised from 0.2% to 0.5%
Retail sales registered a 1.6% growth for the month of September, which might be below 1.7% growth expectations, but still marked the strongest increase since March 2015. On an annualized basis, sales grew by 4.4% against August’s 3.2% growth.
Apparently, 8 out of 13 categories reported increases with sales of motor vehicles and gasoline station receipts jumping as residents replaced flood-damaged motor vehicles after the hurricanes.
Taking out auto and gas purchases still gives us a 1.0% increase, though, which is way better than the expected 0.5% uptick.
Unfortunately for dollar bulls, the miss in the CPI report – which was released at the same time as the retail sales data – came too close to the FOMC minutes release.
If you recall, the Fed noted that “many” members are starting to think that the period of low inflation may not be temporary. As a result, the Greenback still dropped low and stayed low until the end of the day.
What’s expected this time?
- Headline retail sales (m/m): +0.1% vs. +1.6% previous
- Core retail sales (m/m): +0.2% vs. +1.0% previous
It looks like market players are expecting major weaknesses in October’s sales compared to September. Unfortunately, leading indicators are showing mixed readings.
Total light vehicle sales posted a 1.3% decline for the month of October, which is consistent with analysts’ lower expectations.
The latest NFP report also reflected a bit of weakness, with the retail trade sector losing a net of 8,300 workers from September to October after already shedding 2,900 workers in September and 7,300 jobs in August.
However, Markit’s services PMI respondents are attributing their higher prices to “higher client demand” while ISM’s non-manufacturing report showed retail-related improvements in business activity, new orders, and employment.
Last but not the least is Conference Board’s Consumer Confidence Index, which just hit its highest levels in nearly 17 years in October as consumers became more optimistic over the job market and their short-term outlook.
Historical tendencies help a bit since analysts tend to undershoot their guesstimates for the headline reading, resulting in more upside surprises for the headline reading. However, there’s no clear historical tendency when it comes to the core inflation readings since analysts exceeded their guesstimates half of the time and undershot during the other half. Seriously, who’s paying these guys?!
For forex traders out there who are planning on trading tomorrow’s events, keep in mind that these two reports will be printed simultaneously.
Better-than-expected readings will likely push the Greenback higher across the board, while big misses will likely inspire another selloff that could last the entire trading session.
In case the reports showed mixed readings, though, I suggest you pay closer attention to the CPI report. We know that a few Fed members are already hinting that they’re uncomfortable with longer periods of low inflation, so you can bet your iPhone X that they’ll pay attention to the release.
Good luck and good trading, folks!