PRIMER: US CPI data will be released at 13:30BST/08:30EDT; analysts expect annual rates of inflation to cool
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EXPECTATIONS: Headline consumer prices are expected to rise by 0.3% M/M (prev. +0.1%), although the annual rate is expected to cool to 3.1% Y/Y from 4.0%; the core measure of inflation is expected to rise 0.3% M/M (slightly softer than the prior pace of +0.4%), while the annual rate of core inflation is seen cooling to 5.0% Y/Y from 5.3%. -
OTHER GAUGES OF INFLATION: Hopes of cooler inflation were supported this week in wake of the Manheim data on used car prices, while a New York Fed Consumer Expectations Survey also alluded to cooling inflation dynamics, with expectations of near-term inflation falling to the lowest since April 2022. Both these prints helped to offset some of the fears seen in wake of last week’s US jobs data, where the rate of annual average earnings ticked up unexpectedly. -
THE CPI DATA ITSELF: Meanwhile, today’s CPI data itself is likely to show declines in the volatile used auto prices component after a period of strong increases, while other goods categories are likely to have minimal inflation. Analysts also expect that services inflation including shelter will continue to inch lower, while some - like analysts at Credit Suisse - say that the ex-shelter measure may come in slightly below 0.3%. CS is slightly below consensus in looking for core inflation to rise 0.2% M/M; it says that a reading in-line with its estimates would represent the lowest run rate for core inflation in 22 months, and the first time core inflation has been broadly in-line with target over that period. The bank cautions that the decline is likely to be exacerbated by volatile components, which could reverse higher later in the year, but nonetheless, this would be encouraging for the Fed after months of disappointment. -
FED PRICING: Analysts say that the easing of annual core inflation would be a welcome development for the Fed. At pixel time, money markets are discounting a circa 90% chance that the Fed will lift rates by 25bps at its July 26th meeting; many analysts say that today's data is unlikely to shift that dynamic. However, the market is assuming that the Fed will be at terminal after another hike, whereas the Fed's own projections have pencilled in two further hikes this year; a hot reading today could see the market's view come into alignment with the Fed's forecasts.
SCENARIO ANALYSIS VIA JPMORGAN:
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Headline at or above 3.7% Y/Y: "For the first tail-risk scenario to come to fruition, we would likely experience a significant increase in core inflation, creating a worrying trend for the Fed. Here, would expect a significant increase in bond yields, bond vol, equity vol, and a stock sell-off. Further, expectations for the Fed to do 50bps in July arise with some additional hikes priced in for the remaining meetings. SPX loses 2-2.5%." -
Headline between 3.3-3.6%: "This scenario will do little to assuage concerns that the Fed ends its hiking cycle soon and would call into question inflation forecasts considering the expected rise to Energy prices this summer and a still strong consumer. With base effects expected to move from tailwind to headwind, we could see the bond market increase its rate hike expectations. SPX loses 1-1.25%." -
Headline between 3.0-3.2%: "This is what the market broadly expects despite there being some whispers that we see a sub-3% print. This outcome represents another large step-down in inflation. While some of this is due to base effects, e.g., the June 2022 print dropping out, where the +9.1% marked the cycle high. This outcome continues to support the disinflation narrative but is unlikely to move the Fed from hiking 25bps in July; but, it may be enough to remove further rate hike expectations for the balance of the year. SPX adds 0.50-0.75%." -
Headline between 2.8-2.9%: "This outcome represents the whisper number referenced in the bullet above. The 110-120bps decline in headline inflation would be the largest of the cycle. Given the moves in PPI, which also fed into ISM Prices Paid, could reset expectations for inflation to stay under 3%. If so, we could see rate hike expectations for July fall; in our view if you saw those expectations fall under 45% then we may see the Fed capitulate and do another 'hawkish skip’ since we would have seen inflation largely normalise before feeling the full effects of the tightening cycle. Further, we could see Jackson Hole (Aug 24-26) marking the unofficially official end of the tightening cycle. Lastly, given the recent jobs and macro data, this would represent a Goldilocks scenario of growth without inflation, similar to what the US mostly experienced pre-COVID. SPX adds 1.5-1.75%." -
Headline at or below 2.7%: "This tail-risk outcome is seemingly more probabilistic than the other tail given the real-time inflation indicators point to headline numbers being below 2.5%. If this were to come to fruition, this likely does two things (i) removes the July hike from expectations and (ii) adds back rate cuts in Q4 2023. Focusing on the second point, if inflation is “cured” then we could see the Fed refocus on full employment and financial stability, both of which would benefit from less restrictive rates. This could ignite a bull market for both Equities and Fixed Income. SPX adds 2.5-3%."
12 Jul 2023 - 08:30- EquitiesData- Source: Newsquawk
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