What is the market anticipating ahead of the US CPI data later?
The market is gearing up for what it expects to be a blockbuster US CPI report later today but really, will it tell us anything that we don't already know? I don't think so.
The estimate is for US CPI to come in at +3.6% y/y (it was +2.6% y/y in March) and that will be the highest reading in over a decade with the core reading also set to jump to +2.3% y/y from +1.6% y/y in March.
Despite the jump in the figures, a lot of this can still be attributed to base effect adjustments due to the plunge in energy prices in April last year amid the pandemic hit. I mean, remember when oil prices turned negative?
As such, the month-on-month print might offer a better gauge of how price pressures are actually developing this year instead. That might be what traders may choose to focus on later in the day with the headline reading estimated at +0.2% m/m.
A beat there may solidify the notion that price pressures are growing but how much of that may be due to rising input cost inflation feeding through remains up for debate.
And the question is, how sustainable will that be once global economies start to reopen further i.e. more normal trade conditions? More importantly, how much of this development is the Fed willing to tolerate i.e. pass this off as transitory inflation instead?
So far, shortages in the jobs market and rising input/output cost inflation are things that the Fed have brushed aside, but every passing data point reaffirming the narrative that higher inflation is coming will no doubt chip at their defenses.
The real question for market participants is, where do they see the Fed drawing the line and folding - if the central bank even considers to do so at some point.
It could be today. It could be the next set of key economic releases. But at some point, something's gotta give either between the market's inflation bets or the Fed's existing monetary policy stance.
A beat in the prints today will continue to stoke inflation fears but it wouldn't be anything we don't already know. The bond market is still the key area to watch after sellers showed much resilience on the non-farm payrolls miss on Friday.
That could see the dollar keep steadier footing on the day as well.
On the flip side, a miss is likely to trigger less fears of tightening and that the Fed is "right" in keeping easy policy for longer. That could drag yields lower but I doubt it will take inflation bets completely off the table, as we have learned last week.
In any case, expect equities to still face bouts of volatility and that is going to keep things interesting after having hit fresh record highs last Friday.
TLDR: US CPI data may not tell us anything that we don't already know but any decent beat/miss may still trigger some reaction in the market even if it doesn't change the overall narrative in the bigger picture.
