US core CPI
The highlight of the trading week is undoubtedly Thursday’s US CPI report. Earlier today I wrote about what’s expected for the July US CPI report but that’s not the same as trading it.
The short version is that on both core and headline, the consensus is +0.2% m/m. If there’s a reading of +0.1% or lower, the trade is straight-forward: Buy risk assets. Yields will fall, equities will rise and the dollar will slide.
Where it gets trickier is on the upside. The inclination is to do the opposite if we get a +0.3% reading but that’s where it gets interesting. A +0.3% m/m would take the y/y reading to around 3.4%, which is higher than the Fed’s target but not really an alarming headline. Couple it with clear signs of disinflation in housing along with used vehicles and the Fed can easily look past it.
But where the market is starting to worry is in the August report, which will be out just before the next Fed decision. Oil prices have risen for six straight weeks and that will put the headline number well above +0.2%, in all likelihood.
An in-line number this month combined with a headline surprise next month is something Powell can excuse but turning dovish after back-to-back high readings starts to look negligent.
Still, I come down on the side that risk assets will shrug off a +0.3% m/m reading but I can’t say that with a great deal of confidence now that the bond vigilantes are out. Today’s 10-year auction held at 3.999%, which tells me there is a great deal of real money demand for 4% yielding safe assets and I don’t think that’s going away.
Now I’m mostly speaking about core with this report and there are plenty of permutations around the composition, rounding and a split between core and CPI but the bottom line is that I think risk assets will probably be fine; unless we see +0.4%.
For more of what’s expected, see the economic calendar.