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#54 - Ahead of Key CPI Data: Market Braces for Potential Downside Surprise, Eyes on USD

US CPI is the key event for the week. The consensus expectation is for the headline CPI to come in at 0.1% MoM (month-over-month), following 0.4% MoM in September, and for the core CPI to be 0.3% MoM, consistent with September’s figure. What should we expect, and how is the market likely to react?

In his speech last week, Powell highlighted three key data points that are important for future policy considerations: October core CPI, November NFP (Non-Farm Payrolls), and November core CPI. Today's number is the first of these and may lead to some volatility if it deviates from the consensus.

US inflation has been trending lower for most of 2023, until June, when the headline rate started to rebound due to base effects. Core inflation has continued to decrease but recently stalled at 4.1% YoY (year-over-year). Given the recent lower-than-expected inflation figures in China, the Eurozone, and Japan, and a slight softening in US activity, we think the risk for today's numbers is biased to the downside.

The market reaction is likely to be asymmetric, with higher volatility expected if CPI surprises to the downside. Bank analysts' expectations seem slightly biased towards a higher outcome for the monthly core CPI number. A monthly core CPI print of 0.3% or lower is likely to be seen as positive for risk, in our view, and may support equities and bonds while undermining the USD. Following the recent strong rally in equity and bond markets, the best risk/reward may lie in short USD positions (e.g., long EUR/USD), especially given the supportive seasonality towards year-end.

Bottom Line: Today's CPI number is crucial for the December Fed policy meeting, as mentioned by Powell last week. We see the risk for the inflation number as being biased to the downside, following the lower-than-expected figures in China, Japan, and the EuroArea. The market reaction is likely to be asymmetric, with a stronger reaction to a downside miss. We see the best risk/reward for such a scenario in short USD positions. Good Luck

Team MacrometR

No Financial Advice. For illustrative purposes only.


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