Inflation on the Radar

Macro Markets

​​After a dead macro week we have the big hitter CPI at 8:30 am today. The highly anticipated CPI will give the market a better idea of the fight against inflation and what the Fed might do for the November FOMC. CPI is expected to show a move up in inflation pressure. With the economy defying pessimism and energy prices rising, economists predict the biggest monthly jump in 14 months. The swap market is pricing in risk that it will come in even higher than expected. Traders expect the Fed to stay on hold until next week and see roughly a 50 percent chance that the central bank will deliver a hike in November. CPI is key because if it halts its downward trend, markets will have to price in a more hawkish Fed. Put in a more familiar way, CPI impacts two of the three pillars of the rally: disinflation and the expectation that the Fed is done with rate hikes.

The market will be watching for the overall level of inflation. Particularly, there will be a focus on the breakdown, especially inflation of services. This includes things like medical care and financial services. This goes back to wage inflation, which we have talked about extensively for months now in the newsletter that will and is the biggest issue with inflation on the Fed's mind. Services prices have continued to rise, driven by rising wages, which are the main cost in delivering most services. As wage growth has dropped recently, services prices might also moderate. The Fed is still watching the data closely for trends here, though recent data has been fairly encouraging.

The other thing to watch in the CPI data is how it affects home prices. The CPI picks up with housing costs with a lag to the latest prices. Much CPI data comes from lease and rent prices, a big part of the housing market. Those are measured using a panel approach, and leases often only reprice annually. Both measurement techniques mean CPI data on shelter costs is slow to follow the latest home price trend by at least several months.

We will provide live commentary on the post-CPI release as we review the data and take positions accordingly. Look for the telegram Macro channel for live trading and results. Become a member today and read the entire newsletter

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