CPI will set the tone for the day
With today's CPI report, I'm more in the camp of wanting to watch and see how the market reacts rather than making bets on which way it should go.
After the May CPI report, the long end of the bond market initially sold off and then went on an impressive month-long rally. The thinking behind lower-rates on higher inflation was that it would mean a) a Fed policy error of tightening too quickly or, b) an earlier but shallower pace of hikes.
I'll be interested to see if there's a repeat on a higher number again.
If there's a miss to the downside, I think there's a much clearer case for selling the US dollar. The market will sense a peak in prices and the pressure will be off the FOMC to taper and hike. It's a move I can see being more long-lasting.
Within the report, I believe the details matter. Last month, the inflation worries eased partly due to the outside contribution of used cars. Those kinds of breakdowns will be helpful in the aftermath of the report.
- Prior was +5.0% y/y
- Expected at 4.9% y/y
- Ex food and energy +4.0% y/y expected
- Prior ex food and energy +3.8%
- CPI m/m+0.5% expected
- Prior m/m reading was +0.6%
- CPI ex-food and energy +0.4% expected (prior +0.7 m/m)