PREVIEW: US January CPI will be released at 13:30GMT/08:30EST; data will shape March FOMC expectations

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  EXPECTATIONS: US consumer prices are expected to rise by +0.5% M/M in January, boosting the annual rate by 0.3ppts to 7.3% Y/Y, which would be the highest annual rate since the early 1980s. The core measure of inflation is seen rising 0.5% M/M too, with the annual rate seen rising by 0.4ppts to 5.9% Y/Y, which would also be the highest since the early 1980s.


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  MARKET REACTION: From a macro perspective, the inflation data may provide some insight to traders on what increment the FOMC will raise rates by at its March 16th meeting; the logic is that any further inflation upside would see markets price a more aggressive course of Fed normalisation (potentially a 50bps March rate hike), while a softer report could signal the Fed will hike by a 25bps increment in March. If the data is in line with expectations, some remind us of the potential for a sell-the-fact market reaction, as was seen in January after the release of the December CPI metrics, which saw the Dollar Index slump to 9-week lows despite price pressures rising.


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  FED REACTION: Many officials have recently played down the prospects of a 50bps move, although they have generally caveated their views based on incoming data. In wake of the release, Fedspeak will be gauged to judge how officials’ views have evolved; any alarm about sharper price pressures would likely see bets of a 50bps move raised by market participants, and conversely, a sanguine outlook after the data, and reaffirmations of views that inflation will come down in the months ahead would likely see more support for a smaller 25bps move in March.


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  STRATEGIST VIEW: JPMorgan's strategists said CPI data was getting more hype than any economic data in recent memory. Its US Head of Cash Trading said "although I am still not intermediate or long term bullish on markets (in a nutshell, I still think if growth holds up, Fed will keep hiking; good news will be met with a more hawkish Fed, and bad news is well... bad news), it does feel to me like the risk/reward is skewed to the upside for CPI," adding that "the recent Fed meeting made clear that incoming inflation data is the only variable that matters for the Fed."


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  THE DATA ITSELF: Many analysts have noted that base effects will likely weigh on headline inflation in the months ahead, but some note that these will still contribute to upside in the January data. Credit Suisse explains that goods inflation is likely to remain strong in January, and used vehicle prices should continue to rise following three months of gains. The bank also cites its own industry sources who suggested that prices were strong in the early part of the month, and although prices for services could ease due to the impact of Omicron, CS argues that increases in wage growth and strong shelter inflation should support a high reading in services CPI.


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  AHEAD: Credit Suisse says that "along with a pickup in shelter inflation, faster wage growth will help support inflation well above 2.0% going forward, even as the temporary shocks to goods prices fade," Credit Suisse writes, "this should support the Fed’s decision to begin a hiking cycle in March, followed by balance sheet reduction in the summer."

10 Feb 2022 - 08:10- Fixed IncomeData- Source: Newsquawk