Recently, US stocks fluctuated significantly due to US inflation data. The most important core CPI month-on-month data in the Consumer Price Index (CPI) will have different impacts on the market every 0.1% change. The upcoming September CPI data for the U.S. will be released this Thursday, which may cause waves in the market again.
CPI is attracting much attention
Nowadays, Feder is committed to stabilizing prices, and even sacrifices the employment market to reduce inflation, which also explains the importance of every inflation data.
On the one hand, CPI measures actual inflation data and is the primary indicator for price increases, which is completely opposite to the survey predicting cost changes in price fluctuations. Although the Personal Consumer Expenditure Index (PCE) is the Fed's preferred inflation indicator, it has given CPI the number one indicator to measure price levels due to the timeliness issues announced only at the end of the month.
On the other hand, among the components of CPI, the core CPI is more important than the overall inflation data. While politicians around the world are very concerned about changes in fuel prices, the market and the Fed are more concerned about potential inflation data. Since the Federal Reserve has launched rate hikes in since March this year, the month-on-month change in CPI has attracted more attention than the year-on-year change.
and the comparison chart of the changes in the euro/dollar since 2021 also reveals the impact of inflation on the market.
(Euro/USD change range - Source: FXStreet)
According to Zhitong Finance, the market predicts that the US core CPI will grow by 0.5% month-on-month in September. Although it is lower than 0.6% in August, the year-on-year increase is 6.6%, more than three times the Fed's expected target of 2%, and higher than the year-on-year increase of 6.3% in August.
The Fed wants to see potential inflation data drop to 2% in a meaningful and sustainable way, or lower.
predicts three situations of CPI in September
(1) The actual data meets expectations:
In this case, the core CPI rose by 0.5% or 0.4% month-on-month. On the one hand, this situation is in line with expectations, indicating that prices are rising and the Federal Reserve's interest rate hike is coming to an end.
On the other hand, even a month-on-month growth of 0.4% means a year-on-year increase of 5%, that is, inflation is still very high, and higher than the low point of this year's indicator. Considering that the core CPI rose by 0.3% twice in 2022, 0.4% is still very high.
How will the market react to this? It is expected that the market will breathe a sigh of relief and the US dollar bulls will take profits, but this may be just a preliminary reaction of the market.
After the market's conditioned reaction, investors will have a new understanding of inflation data. After that, Fed officials may reiterate that the current inflation level is too high and further interest rate hikes are needed to fight inflation.
Therefore, the announcement of the core CPI may become a new opportunity to buy the US dollar, and the Federal Reserve is very likely to raise interest rates by 75 basis points again in November.
(2) is lower than expected:
Some analysts believe that the month-on-month increase of core CPI is 0.3% or less, which may cause a sharp rise in US stocks and a sharp decline in the US dollar, which is exactly what the Federal Reserve likes to see.
If the actual core CPI data is lower than expected, it will prove that the 0.6% increase in August is a one-time increase. The bond market can only continue to digest the expectation that the Fed would only raise interest rates by 50 basis points in November.
However, given the impact of tight supply chains and rising interest rates on mortgage payments, the probability of core CPI data being lower than expected is a moderate probability.
(3) exceeds expectations:
If the month-on-month increase of core CPI data reaches 0.6% or higher again, it indicates that the low increase of 0.3% in July is special. By then, the market will once again set off a forecast of about 100 basis points in November.
In addition, if the core CPI data rises by 0.7%, it will trigger large-scale US dollar buying and US stock crash.
However, analysts believe that the core CPI is less likely to exceed expectations. However, since the risk of such situations is relatively high, the possibility of such situations cannot be ruled out.
summary
In view of the market's uneven response to non-agricultural employment data last week, and after the first two CPI data were released, it caused significant fluctuations in the market, the September CPI data to be released on Thursday can be said to be "important".
