Hello everyone, this is my first thread, so hopefully everything works fine. I just wanted to bring a few things to your attention before the US CPI data is scheduled to be released today at 8:30am EST. With the forecast for Core and headline CPI m/m at 0.3%. (Figure 1) CPI y/y is forecasted at 3.6%. I have a lot of thoughts about this upcoming CPI print. I think there is a decent chance this print comes in hot and could catch some market participants offsides. My reasoning is simple, October 11th 2023 US PPI came in hot over the forecast by 0.4%.
Figure 1 via Forex Factory
As you can see below in Figure 2 CPI and PPI are correlated somewhat.
had a brilliant piece in his am/FX note yesterday. To summarize Mr. Donnelly back tested to see if PPI misses were good predictors for CPI misses. The answer is yes and no, “The hit rate is only 53%, most of the gains in the strategy come from three good runs, one in 2017, one in 2021, and one in 2022. I would not put a ton of weight on this given the low hit rate, lumpy returns, and flat performance in PPI predictions of Core since 2021. Core is what matters. Odds of both a headline and core miss tomorrow are modestly higher now that we have the PPI data, but not enough to convince me that it matters.” from am/FX. I am of the same opinion as Brent Donnelly when it comes to CPI likely missing.
projection for the CPI monthly print coming around 0.39% was at 30% on October 5th. According to Goldman Sachs reaction function the SPX could gain up to 1.5% if core CPI comes in soft (0.1-0.15%). On a hot print (>0.35%) the index could drop by -1.5%. (From Gamma Labs) I personally do not think the reaction will be that strong, in my opinion ES will lose around -0.65% and gain ground back slowly during the day. I think the much more interesting part of this CPI equation is how will bonds react? Well Goldman Sachs estimates CTAs are currently short -$289 billion on bonds. If the CPI print comes out hot as I predict and we see a flight to safer assets i.e. the Swiss Franc, Gold, etc we could see a rally in longer dated bonds. Although there is a 30Y bond auction today so that is another important factor to watch.
I will be watching ZT & ZB like a hawk today. I am very interested to see what you guys think! So please join the discussion, if there is interest I will keep this thread updated. Also do not be hesitant to join the discussion for fear of being wrong. There is a good chance I will be wrong, I am a firm believer in learning through mistakes. That is all for now, This Week in Charts should be done soon so keep an eye out for that. Thank you for reading and supporting Celeritas Capital it is truly humbling.
The higher PPI did not help the dollar yesterday, so the question for me is also whether the dollar can benefit from higher CPI (if!) today or whether the sell off will continue.
I fully agree with you that dollar is going to be key for the market. What do you think about the trajectory of the dollar if rates and real rates have peaked?
The higher PPI did not help the dollar yesterday, so the question for me is also whether the dollar can benefit from higher CPI (if!) today or whether the sell off will continue.
That is a great point, the dollar is going to be key for the entire market. personally i can see it selling off more today.
I fully agree with you that dollar is going to be key for the market. What do you think about the trajectory of the dollar if rates and real rates have peaked?
Good analysis.