Heads up, forex friends! The U.S. will be releasing its CPI report tomorrow at 12:30 pm GMT, so buckle up because there’s a good chance that the Greenback may get a volatility boost.
And if you need to get up to speed on what happened last time and what’s expected this time, then you better read up on today’s Event Preview.
What happened last time?
- Headline CPI (m/m): +0.2% vs +0.3% expected, +0.2% previous
- Core CPI (m/m): +0.1% expected vs. +0.2% expected, same as previous
- Headline CPI (y/y): +2.7% vs. +2.8% expected, +2.9% previous
- Core CPI (y/y): +2.2% vs. +2.4% expected, same as previous
The August CPI report showed that headline CPI rose by 0.2% month-on-month in August. This matches the monthly rate recorded in July, but was a disappointment since the market was expecting a 0.3% increase.
Year-on-year, headline CPI increased by 2.7%, which is a tick slower compared to the +2.8% consensus and is the weakest increase in four months to boot.
As for the core reading, that came in at +0.1% month-on-month, which is also a swing and a miss since the market was expecting a 0.2% increase.
On an annual basis, the core reading increased by +2.2%, contrary to expectations that the core reading will match the previous month’s +2.4%. The weaker reading also marks the first slowdown after three consecutive months of ever stronger readings.
Looking at the details of the report, the cost of energy increased by 1.9% month-on-month (-0.5% previous), thanks largely to higher fuel costs. However, this was offset by the decreases and/or weaker increases from other CPI components. And that’s why the headline reading maintained the monthly pace.
The energy component is excluded from the core reading, though, which is why the core monthly reading deteriorated.
The slowdown for the annual headline reading, meanwhile, was due mainly to the weaker increase in energy prices (+10.2% vs +12.1% previous).
However, the cost of non-energy commodities also fell by 0.2% (0.0% previous) and the cost of services also increased at a slower pace (+3.0% vs. +3.1% previous), which is why the annual core reading also took a hit.
Overall, the August CPI report was disappointing on the surface and the details didn’t really provide any relief. And as a result, the Greenback got slapped lower across the board.
There was also some follow-through selling, but buyers tried to send the Greenback higher later, thanks to this tweet from Trump.
The Wall Street Journal has it wrong, we are under no pressure to make a deal with China, they are under pressure to make a deal with us. Our markets are surging, theirs are collapsing. We will soon be taking in Billions in Tariffs & making products at home. If we meet, we meet?
— Donald J. Trump (@realDonaldTrump) September 13, 2018
You see, a Wall Street Journal report broke the news back then that U.S. Treasury Secretary Steven Mnuchin has invited China to another round of trade talks.
Of course, we now know that trade talks were called off after the U.S. pushed through with its plans to announce additional tariffs against China.
What’s expected this time?
- Headline CPI (m/m): +0.2% expected, same as previous
- Core CPI (m/m): +0.2% expected vs. +0.1% previous
- Headline CPI (y/y): +2.4% expected vs. +2.7% previous
- Core CPI (y/y): +2.3% expected vs. +2.2% previous
For the inflation situation in September, the general consensus among economists is that the headline CPI reading will maintain the monthly pace of +0.2%, but the core reading is expected to accelerate from +0.1% to +0.2%.
As for the year-on-year readings, the consensus is that the headline CPI reading will slow down further by printing only a 2.4% increase (+2.7% previous). However, the core reading is expected to pick up the pace (+2.3% expected vs. +2.2% previous).
There’s therefore an implied consensus that non-food and non-energy CPI components increased at a faster pace in September. And remember, energy and food are excluded from the core reading.
So, what do some of the leading indicators have to say?
- The prices index of ISM’s manufacturing PMI report dropped from 72.1 index points to just 66.9, which means that input costs are still elevated but increased at a weaker pace in September.
- Markit’s manufacturing PMI report doesn’t agree with ISM’s findings since Markit found that “The rate of input price inflation matched that seen in August.”
- And while manufacturers are passing on their higher costs, Markit also found that “the rate of inflation dipped to a nine-month low, amid reports that some companies were reluctant to raise factory gate prices.”
- The prices index of ISM’s non-manufacturing PMI report increased from 62.8 to 64.2.
- Markit’s services PMI report corroborates ISM’s PMI report since Markit found that “the rate of inflation was steep and accelerated from August’s recent low.”
- More importantly for CPI, “output prices charged by service providers continued to rise in September. The pace of selling price inflation accelerated to the fastest in the nine-year series history.”
What about historical tendencies? Do they offer additional insights?
There are no clear historical tendencies when comparing the headline readings for September and August. However, there are slightly more instances where the September reading is stronger.
As to how economists fared with their guesstimates, we can see that they actually get it right … about half the time. Other than that, there aren’t really any other insights we can glean from the historical data.
As for the core reading, comparing the August and September readings don’t really yield anything useful.
However, economists apparently have a clear tendency to be too optimistic with their guesstimates since there have been plenty of downside surprises over the years.
To sum it all up, there is an implied consensus that non-food and non-energy CPI components drove inflation higher in September since both the headline monthly reading is expected maintain the pace but the monthly core reading is expected to improve.
The consensus, especially for the core reading, is supported by the leading indicators since they point to stronger inflationary pressure in September. The only outlier was ISM’s manufacturing PMI report since that, er, reported that input prices in the manufacturing sector slowed.
However, Markit’s note that “output prices charged by service providers … accelerated to the fastest in the nine-year series history” is particularly noteworthy since services actually account for around 59% of CPI.
As for historical trends, there aren’t any apparent trends for us to exploit. Well, there is one.
You see, economists tend to overshoot their guesstimates for the September core reading, resulting in lots of downside surprises, which skews probability more towards a possible downside surprise … for the monthly core reading at least.
However, our available leading indicators don’t seem to agree with that. And as always, do be reminded that we’re playing with probabilities here, so there’s always a chance that the core reading may surprise to the upside.
Anyhow, just remember that the Greenback usually (but not always) has a knee-jerk reaction to the monthly headline reading, with a better-than-expected reading usually cause the Greenback to jump higher, while misses generally result in a quick selloff.
As for follow-through selling, that’s where the core reading and other details of the CPI report usually come in.
At any rate, do keep in mind that if news trading ain’t your thing or if high volatility makes you uncomfortable, then just remember that you can always choose to sit on the sidelines and wait for things to settle down.