MARKET MOVING EVENTS:
Thursday: US CPI.
Last week we got three important reports: the US ISM Manufacturing and Services PMIs and the US NFP. The former leading indicators point to a significant deceleration in the manufacturing sector and more cooling in the services sector, while the latter lagging labour market report keeps on showing strength.
The Fed is focused solely on inflation though and we got some good news as the prices paid subindex in the manufacturing PMI keeps on falling and it’s at the lowest level since June 2020 and the prices subindex in the services PMI is at the lowest since January 2021. Moreover, the average hourly earnings, although still elevated, decreased and a wage price spiral looks unlikely at this point all else being equal.
The market didn’t like the Friday’s jobs report as right now the only thing it wants to see is bad news in order to price a less aggressive monetary tightening from the Fed. In fact, the Fed is sort of forced to keep on tightening, as the fear of letting go too early and see financial conditions easing and spark another round of inflation makes it hard for them to give much weight to forward looking indicators and makes them to prefer focusing on lagging data for clear signs of inflation getting back to target. Moreover, as long as lagging/coincident indicators show strength, they will have more confidence in tightening aggressively, which increases the risk of overtightening in the end.
This week the market will be focused on one single data point: the US CPI report on Thursday. In the big picture it shouldn’t change much, as the global recession coupled with the Fed forced on keeping at it is bad for risk sentiment anyway, but in the short term it looks like a binary event with a beat on expectations resulting in a heavy risk aversion favouring the USD and a miss on expectations weighing on the US Dollar.
The expectations are quite high going into the event. The headline CPI is expected to show a 0.2% increase for the M/M reading and an 8.1% figure for the Y/Y reading. The Core CPI is even uglier with a 0.5% increase expected for the M/M reading and 6.5% for the Y/Y. Unless we see a notable miss, the Fed is going to hike by 75 bps anyway at the November meeting. A hot report will, of course, put the 100 bps hike again on the table. The price action may lean on the defensive going into the event as the expectations and the memory of the surprisingly hot CPI report last month is still fresh.
This article was written by Giuseppe Dellamotta.
