It's all about inflation for the Federal Reserve and that means Tuesday's US consumer price index report will be pivotal.
Fed Chairman Jerome Powell teed it up best in his testimony last week when he said:
- He wants to see 'some good inflation readings'
- He is not looking for better inflation readings than we've had, looking for more of what we have seen
That sets the bar for the report and for the market reaction.
What are economists expecting?
Core CPI jumped in January and it's expected to give some of that back in February, though the bias is towards uncertainty. For the numbers excluding food and autos, CPI is expected at:
- +0.3% m/m vs +0.4% prior
- +3.7% y/y vs +3.9% prior
- Estimates range from 3.6% to 3.9%
As for the headline, the consensus is:
- +0.4% m/m vs +0.3% prior
- 3.1% y/y vs +3.1% prior
- Estimates range from 2.9% to 3.2%
The final number that could be a market mover is the real weekly earnings metric. There is no consensus but the prior reading was -0.3%.
Under the covers, the market is going to be focused on evolving shelter metrics. I highlighted this last week as the US BLS has been under some fire for divergences is rent and owners’ equivalent rent.
Last month, markets had a minor freakout on the inflation data but quickly saw the owners' equivalent rent skew and I'd imagine that will be even quicker this year. The all-items less shelter line and how it evolves from 1.5% will be a quick hint. However the main thing to watch will be OER minus rent, which was at 0.189% last month, the largest difference since October 1995.
If that skew persists it could lead to another ugly print but the market (and likely the Fed) would be quick to discount it. It's also possible that it reverses and leads to a downside surprise in CPI. This may also be faded but I think that's less likely because the Fed wants to cut.
Overall, the market will be trying to dig through more of the components and sort out the underlying trend in services inflation. This can be tough with things like healthcare and pharmaceuticals, which are an increasing part of the American budget. Beyond that, looks for prices of things like restaurants, food and travel for broader signals.
