PRIMER - US CPI data due 13:30BST/08:30EDT; analysts expect headline and core rates of annual inflation to ease in September

EXPECTATIONS: Headline CPI is expected to rise at 0.3% M/M in September (prev. +0.6%), while the annual rate is seen easing a little to 3.6% Y/Y from 3.7%. The upside in gasoline prices is likely to support the headline, but underlying price growth is expected to be more benign, analysts say. The core rate of inflation is expected to rise 0.3% M/M in September, matching the rate of gains seen in August, while the annual core measure is expected to pare back to 4.1% Y/Y from 4.3%.

TRENDS: Goldman Sachs is expecting to see three trends in the September CPI data: 1) it expects a 2.3% decline in used car prices, and a 0.1% decline in new car prices, reflecting lower used-car auction prices throughout the summer, increases in promotional dealer incentives, and higher new car inventories; 2) it expects car insurance prices to increase 1.7% as insurance rates continue to catch up to higher repair and replacement costs; 3) it expects shelter inflation will remain roughly at its current pace (the bank forecasts rent will increase by 0.5% and OER to increase by 0.5% on a rounded basis), as the gap between rents for new and continuing leases continues to close.

TRADING CPI SCENARIOS (VIA JPMORGAN):

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  Headline above 0.6% M/M, SPX loses 1.5-2.0%: "This tail-risk outcome would ignite fears of a 1970s style inflation 'wave' whereby we would begin another significant upswing in inflation data, with both commodity and core prices leading the headline number higher," JPM writes, "this would likely increase the probability of hikes for both November and December and reduce cuts from the 2024 forecast."


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  Headline 0.4-0.6%, SPX would fall 0.75-1.25%: "While not as extreme of an outcome as above, the bond market would likely price in a more hawkish Fed, potentially taking terminal rate to 6% for the first time this cycle," JPM says, adding that as with the previous scenario, "the risk is that a more active Fed increases the probability that something breaks while also increasing the depth of the subsequent recession." However, JPM caveats that the magnitude of the market’s move in response to a hawkish print will also depend on which CPI component surprised to the upside with leadership from Core Services triggering the most down-side and upside from commodities the least.


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  Headline +0.3% M/M, SPX would gain 0.4-0.75%: "This would be a positive outcome that would likely keep stocks on their current trajectory (higher)," JPM writes, "while macro data is inflecting higher the risk is that an already strong US consumer risks overheating due to the tight labour market." JPM argues that a consensus number like this would not be "Goldilocks" but would still be close, and that would keep Fed hiking expectations at "none-and-done".


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  Headline 0.2-0.3% M/M, SPX would rise between 1.0-1.5%: "This would likely show a dovish miss for Core CPI given the rise in commodity prices is a known driver," JPM says, "further, this would be the largest M/M decline of the year and the third largest since the hiking cycle commenced," and would be the "Goldilocks scenario," the bank says.


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  Headline below 0.2% M/M, SPX would add 1.5-2.0%: "Another tail-risk outcome where some of the most interesting moves could come from the bond market," the bank writes, "the closer to zero/negative, the more we would likely see rate cuts pulled forward as the Fed would be seemingly closer to declaring 'Mission Accomplished'. JPM forecasts the next six Headline CPI M/M prints will average 0.13%, with headline Y/Y averaging 3.0%; JPM says printing below those averages "may change the narrative on sticky inflation, which would likely pull bond yields lower and support stocks."

GOING FORWARD: GS expects monthly core CPI inflation will remain in a 0.2-0.3% range in the next few months. "We expect continued moderation in shelter inflation and lower used car prices to be partially offset by a positive swing in the CPI’s health insurance component when the BLS incorporates new data and a methodological change next month," GS writes, adding that it forecasts core CPI inflation of 3.8% Y/Y in December 2023, falling to 2.9% Y/Y in December 2024.

12 Oct 2023 - 07:10- EquitiesData- Source: Newsquawk