PRIMER: US CPI expected to tick up in July; still more data due before the Fed's September meeting

CONSENSUS: The consensus view looks for headline US consumer prices to rise +0.2% M/M in July (prev. +0.2%), though the annual rate is seen ticking up to 3.3% Y/Y from 3.0%. The core rate of inflation is also expected to rise +0.2% M/M, matching the pace seen in June, with the annual rate of ore inflation seen unchanged at 4.8% Y/Y.

DRIVING THE DATA: Credit Suisse says the rise in annual headline inflation will likely be driven by unfavourable base effects and modestly higher gas prices, but services inflation should continue to decline. "Shelter inflation now appears to be easing with the expected 12-month lag from measures of new rents and house prices," the bank notes, adding that it expects a further gradual decline, with hotel prices contributing negatively; that said, it still sees the monthly run rate of shelter prices to remain above target nonetheless. Ex-shelter, it expects services inflation of +0.3% M/M. Used auto prices are also seen falling for a second straight month, as alluded to in the recent Manheim data, which CS says typically leads used autos CPI by a couple of months. "A reading in-line with our expectations would represent the second consecutive month that monthly core inflation has been broadly in-line with the Fed’s target," Credit Suisse writes, "to some extent, negative contributions from volatile components are still driving the decline,  these could reverse higher later in the year."

TRADING CPI - FIVE SCENARIOS FROM JPM: 

• 
  CPI rises +0.4%+ M/M: S&P 500 would fall 1.75-2.00%. "The market reaction here would drive bond yields higher, including the 10yr yield to a new 52-week higher."


• 
  CPI +0.2% M/M: S&P 500 would rise 0.25-0.5%; "While this would be positive, it may be a move that is faded as the market shifts its focus to Jackson Hole (Aug 24-26th) where it seeks to gain confirmation of the Fed’s rate hike intentions"


• 
  CPI +0.1-0.2% M/M: S&P 500 would rise 1.0-1.5%; "A ‘mission accomplished’ outcome would mean earlier than expected rate cuts. Though it may be too soon to see this narrative emerge, consider that if we see consumer behavior shift from Services back to Goods, then we may see an inflation undershoot more quickly given the deflationary impulse from China."


• 
  CPI +0.2-0.4% M/M: S&P 500 would fall between 1.0-1.5%; would give less credence to a disinflation narrative.


• 
  CPI below 0.1% M/M: The S&P 500 would rise 1.5-2%; "Another tail-risk outcome which has a wide range of outcomes. If we saw a negative MoM print, then think it strengthens narrative from the above bullet but until the bond market gains confidence that it knows the Fed has completed the hiking cycle the yield curve will remain inverted, in the front-end." 

CURRENT FED PRICING:

• The market current prices that the Fed is already at terminal, at between 5.25-5.50%; however, the Fed's economic forecasts have suggested that the central bank still has scope for another rate rise. Therefore, any hawkish outcome in the CPI data may help tilt market pricing to align more with the Fed's view.


• That said, there are still a number of key data releases ahead of the September 20th FOMC, with another jobs report and another CPI report due before then, leaving officials with plenty of room to continue assessing incoming data. 


• Additionally, traders will want to hear the views of key Fed officials at Jackson Hole (August 26-28th), a forum which has previously been used to telegraph policy changes. 

10 Aug 2023 - 07:20- Fixed IncomeData- Source: Newsquawk