PREVIEW - US CPI (13:30BST/08:30EDT): Annual headline US inflation expected to tick higher on higher energy prices, but annual core inflation is seen lower

• 
  EXPECTATIONS: Headline inflation is expected to rise 0.6% M/M in August, picking up in pace versus the 0.2% M/M printed in July; the annual headline is expected to rise to 3.6% Y/Y from 3.2%. The core rate is seen up 0.2% M/M, matching the prior month; the annual core rate is seen easing to 4.3% Y/Y from 4.7%.


• 
  DRIVING THE DATA: Higher energy prices are likely to drive the headline up, but the core rate is seen steady. "While inflation will continue to moderate, the path to 2% price growth will be slow and rocky," Moody's writes, "the ongoing decline in used-vehicle prices will provide some downward pressure, but the biggest shoe yet to drop is related to housing and rent prices, where weakness from late 2022 has yet to show up in the CPI."


• 
  POLICY: Fed officials have recently been striking a balanced approach to guiding policy, welcoming the progress already made in bringing price pressures down, but noting that there is still further to go, while generally caveating their policy views around incoming data. From the market's perspective, the FOMC has already reached its terminal rate, and instead, the focus appears to be on when the central bank will begin to cut rates. Recent data releases have seen the timing swing towards May when the data has been weak, and out to July when data has been strong; the CPI data is likely to continue this pattern.

TRADING SCENARIOS VIA JPM US MARKET INTELLIGENCE:

• 
  Above 0.7% M/M: SPX loses 2-2.5%. "For this tail-risk outcome, we will need to see Core inflation reaccelerate higher, which is counter to consensus," JPM writes, "this scenario would be the one that illustrates the downside risk of the tight labour market combined with a US Consumer that is acting as a “levered spender”," the bank says, adding that such an outcome could see the bond market price in a full 25bps hike in November, while also pricing in closer to a 50/50 chance for a hike in September.


• 
  Up +0.55-0.7% M/M: SPX loses 1-1.5%. "This outcome could give rise to the stagflation narrative, subject to the information provided by the CPI components," JPM writes, "a hotter than expected print that was led by say housing, which we know to be lagged, would be different than if we saw a spike to vehicle prices and transportation." JPM says the latter being driven by an increase in consumer spending, which is leading to improved GDP forecasts, and the former could be written-off to the peculiarities of CPI. "The biggest risk being a Fed forced to hike into/through the beginning of a recession," the bank adds.


• 
  Up 0.45%-0.55% M/M: SPX adds 25-75bps. "Many investors expect that June represents the lowest Y/Y print of this year, and that we see an increase before seeing sequential declines in virtually each month of 2024," JPM says, "in August, we expect to see headline come in stronger than core given the resurgence in oil prices which added 15% in July and 2.8% in July." JPM adds that "ultimately, this print is not strong enough to draw the Fed back to resuming its hiking cycle," and the bond market will likely react favourably to this print with yields moving lower.


• 
  Up 0.3-0.45% M/M: SPX adds 1.25-1.75%. "This outcome represents an increase in from the prior month’s level, so while this increase is expected this print will not assuage investors that inflation is cured nor that the Fed is completely sidelined." That said, JPM says that this outcome would eliminate the potential for a September hike, and could reverse much of the move for the November meeting, which would be a positive catalyst for bonds.


• 
  Below 0.3% M/M: SPX adds 2-3%. "The second tail-risk outcome, which would arguably be more impactful given the reduced bullish positioning," JPM writes, "in the most extreme case, inflation falls M/M despite the increase in commodity prices which would mean that core came in significantly softer than expected." The bank says that if we saw the print in this zone, we could see the 3-month annualised number come under 2%  on the headline level, and for the second straight month with core coming in at/below 3%; "this could push the bond market consensus to thinking the hiking cycle is complete, inflation is cured, and the next discussion is over the timing of rate cuts."

13 Sep 2023 - 07:30- Fixed IncomeData- Source: Newsquawk