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Heads up, forex friends! The U.S. will be releasing its CPI and retail sales reports this Friday (October 13, 12:30 pm GMT), so buckle up because there’s a good chance that the Greenback will be a getting a volatility infusion.

1. U.S. CPI Report (September)

What happened last time?

  • Headline CPI (m/m): +0.4% vs. +0.3% expected, +0.1% previous
  • Core CPI (m/m): +0.2% as expected vs. +0.1% previous
  • Headline CPI (y/y): +1.9% vs. +1.8% expected, +1.7% previous
  • Core CPI (y/y): +1.7% vs. +1.6% expected, +1.7% previous

The headline reading for August’s CPI printed a 0.4% month-on-month rise, which is faster than the expected 0.3% increase, as well as the previous month’s soft 0.1% rise.

Year-on-year, this translates to a 1.9% increase, which marks the second month of ever stronger annual readings and is a tick faster than the expected +1.8%.

Looking at the details, both the stronger monthly and annual readings were driven mainly by higher energy costs, particularly the 6.3% month-on-month and 10.4% year-on-year surge in gasoline prices.

And the higher gasoline prices, in turn, were due to the disruptions of refineries caused by Hurricane Harvey at the time.

Moving on, if energy and food components are excluded to get at the core reading, then CPI rose by 0.2%, which is within expectations and faster than the previous month’s +0.1%.

And on a year-on-year basis, core CPI maintained the previous month’s pace of +1.7% instead of slowing to +1.6%. As such, underlying CPI looked upbeat.

However, a closer look at the details shows that most of the other non-food and non-energy CPI components actually printed weaker increases or declines.

It just so happens that the shelter component, which accounts for around 33% of total CPI, printed stronger monthly (+0.5% vs. +0.1% previous) and annual (+3.3% vs. +3.2% previous) readings.

Overall, the August inflation report looked rather good on the surface, which is why the knee-jerk reaction was to try and buy up the Greenback.

USD Index: 15-Minute Forex Chart
USD Index: 15-Minute Forex Chart

However, sellers later jumped in and even began to win out near the end, likely because the details revealed that CPI was propped mainly by higher costs for shelter and gasoline while most of the other components either printed weaker increases or even negative readings.

And since the surge in gasoline prices was driven mainly by disruptions caused by Hurricane Harvey, it’s likely that the rise in gasoline prices is not very sustainable.

What’s expected this time?

  • Headline CPI (m/m): +0.6% expected vs. +0.4% previous
  • Core CPI (m/m): +0.2% expected, same as previous
  • Headline CPI (y/y): +2.3% vs. +1.9% previous
  • Core CPI (y/y): +1.8% vs. +1.7% previous

For this Friday’s September CPI report, most economists forecast a 0.6% month-on-month and 2.3% year-on-year increase for the headline reading, so the consensus is that the headline reading will improve further.

The core reading, meanwhile, is expected to maintain the 0.2% month-on-month rise but accelerate from +1.7% to +1.8% year-on-year.

There is therefore also an implied consensus that food and energy prices will increase at a faster pace since the headline readings are expected to improve further.

Meanwhile, non-food and non-energy components are expected to only improve slightly since the monthly core reading is only expected to maintain the previous month’s pace while the annual core reading is only expected to accelerate slightly.

Moving on to the leading indicators, the price index from ISM’s manufacturing PMI report jumped by 9.5 index points to 71.5. This means that companies in the manufacturing sector saw higher input costs in September.

And according to survey respondents quoted by the ISM, “Hurricane Harvey, and now Irma, have impacted the business … causing significant price increases on input raw materials.”

Markit’s manufacturing PMI report corroborated ISM’s findings since Markit found that “Input prices increase at fastest pace since December 2012.”

Moreover, Markit’s survey respondents “commented that raw material prices – notably for metals – were driven up after the recent hurricanes.” Also, Markit found that “Firms generally passed on greater cost burdens to clients through higher charges.”

Shifting to the price index from ISM’s non-manufacturing PMI report, that also improved, surging by 8.4 points to 66.3.

Likewise, Markit’s services PMI report corroborated ISM’s findings because “the rates of both input cost and output charge inflation accelerated in September.”

And similar to the manufacturing sector, both Markit and ISM cited the recent hurricanes for higher input costs.

As for historical tendencies, economists were right on the money half of the time in the last 10 years, at least with regard to the monthly headline reading.

However, economists tend to be too optimistic when it comes to the monthly core reading since there were far more downside surprises.

To sum it all up, leading indicators indicate that the inflationary pressure because of the hurricanes were still in play, causing input costs to rise further. And according to Markit, companies are still passing on their higher input costs, which means that CPI will also likely rise further.

And based on historical tendencies, economists were right more often than not, so the consensus for a stronger headline reading sounds about right.

Interestingly enough, however, economists tend to overshoot their guesstimates for the core reading, so there have historically been more downside surprises.

2. U.S. Retail Sales Report (September)

What happened last time?

  • August headline retail sales (m/m): -0.2% vs. +0.1% expected
  • July headline retail sales (m/m): revised lower from +0.6% to +0.3%
  • August core retail sales (m/m): +0.2% vs. +0.5% expected
  • July core retail sales (m/m): downgraded from +0.5% to +0.4%

The total value of retail sales fell by 0.2% month-on-month in August, missing expectations for a softer 0.1% increase.

Worse, the previous month’s impressive +0.6% reading was downgraded to a less impressive +0.3%.

And browsing through the details of the retail sales report, the negative headline month-on-month reading was due to 1.6% slump in sales from vehicles and parts dealers.

And of the remaining 12 retail store types, 5 reported declines in sales, 3 reported weaker increases in sales, while the remaining four reported stronger sales, which is why the core reading still printed a 0.2% increase.

However, this is weaker compared to the +0.5% consensus. Also, the previous reading was downgraded slightly from +0.5% to +0.4%.

Overall, the August retail sales report was clearly disappointing, so it’s no real wonder why forex traders reacted by dumping the Greenback.

USD Index: 15-Minute Forex Chart
USD Index: 15-Minute Forex Chart

However, there was no follow-through selling, likely because of profit-taking to avoid weekend risk, as well as profit-taking by those who already profited from the Greenback’s slide after the CPI report.

What’s expected this time?

  • Headline retail sales (m/m): +1.7% vs. -0.2% previous
  • Core retail sales (m/m): +0.9% vs. +0.2% previous

For the September retail sales report, the general consensus is that total retail sales will rebound strongly by printing a 1.7% increase after the previous month’s disappointing 0.2% contraction.

The core reading, meanwhile, is expected to print a stronger 0.9% increase (+0.2% previous).

There’s therefore a consensus that retail trade strengthened in September. Moreover, there’s an implied consensus that the increase in retail sales is broad-based since the core reading is expected to print a stronger reading.

Great but what do the leading and related indicators have to say?

Well, total vehicle sales in September climbed by an annualized rate of 18.6 million, which is more than the previous reading of 16.1 million, which supports the consensus for a stronger headline reading.

ISM’s non-manufacturing PMI report for September, meanwhile, revealed that the retail trade industry reported continued growth in business activity and an increase in new orders. However, survey respondents also noted that the growth in business activity in September was “slower pace than in past.”

Unfortunately, Markit’s services PMI report didn’t have anything to say about the retail trade industry specifically. But Markit did point out that there was “strong client demand in domestic markets,” which may have also benefited the retail trade industry.

Next, CB’s consumer confidence index eased from 120.4 to 119.8 between August and September.

And looking at the September NFP report, the retail trade industry reported a net loss of 2.9K jobs in September after already shedding 7.3K jobs in August and 10.8K jobs back in July. This implies downsizing of personnel in the retail trade industry, which hints at possible weakness.

However, average hourly earning grew by 0.5% month-on-month in September and the 0.1% increase in August was revised higher to show a 0.2% increase. It’s therefore still quite possible that the stronger wage growth translated to stronger consumer spending.

Moving on to historical tendencies, there are no strong historical tendency when it comes to how economists fared with their guesstimates for the headline reading. Economists used to have a tendency to undershoot their guesstimates, which resulted in more upside surprises. However, that historical tendency appears to have ended, based on how economists fared with their more recent forecasts.

As for the core reading, economists tend to undershoot their forecasts since there are more upside surprises. Although there have also been times when they either got it right or were too optimistic with their guesstimates.

Overall, the leading indicators seem to point to the possibility of a softer reading for core retail sales, which is contrary to the consensus for a stronger core reading.

However, vehicles sales picked up the pace, which supports the consensus for a stronger headline reading. Also, there’s still a possibility that consumer spending increased since wage growth accelerated in September.

And while there are no strong historical tendencies for the headline reading, economists do have a tendency to be pessimistic when it comes to their forecasts for the core reading, which is why there are more upside surprises.

Final Thoughts

Do note that the CPI and retail sales reports will be released simultaneously. And as in most cases, the Greenback tends to react positively if the headline and core readings for both CPI and retail sales are better-than-expected. On the flip side, worse-than-expected readings usually lead to a Greenback selloff.

But in the event that the readings end up mixed, then forex traders usually have their sights on the CPI report because of its more direct link to rate hike expectations, with the headline reading usually in focus. After all, the latest FOMC minutes did reveal that “many participants expressed concern that the low inflation readings this year might reflect not only transitory factors, but also the influence of developments that could prove more persistent.

That only applies to the initial knee-jerk reaction, though.

For follow-though buying (or selling) activity, the core reading for CPI and the details of the CPI report tend to have a stronger influence on price action. This is also usually when the readings for the retail sales reading help to dictate price action.