Expect big market moves on Thursday.
In a taste of what's to come, US equities are down around 10% since the previous CPI report a month ago. In it, inflation rose 8.3% y/y compared to 8.1% expected. The core reading was also hot at 0.6% m/m vs +0.3% expected.
Moments after the report, USD/JPY surged to 144.05 from 142.00. It continued higher to 145.90 before the Japanese government intervened to cap it. Even with that, it's up to 146.98 today.
A similar-sized miss could easily lead to an equally-large reaction. Here are the consensus numbers:
- Inflation y/y +8.1%
- m/m +0.2%
- Core CPI 6.5% y/y
- Core m/m +0.5%
The data will be released alongside weekly jobless claims numbers, which will also be notable but certainly not the main market driver.
A month ago, traders were caught leaning towards a low number on the way to a Fed pivot. When it surprised to the upside instead, market participants were offside. That's fresh in the mind of market participants and I suspect that even the bulls will want to see the numbers before making a move.
On the flipside, a material upside surprise (call it 0.2 pp on the monthlies) would put in play a higher terminal Fed rate. With other global central banks set to pause, that sets up expanded rate differentials in favor of the US dollar.
Ultimately, I think this is a trade where you go where the data takes you. A low reading could cause a squeeze higher while a high reading could spark a disorderly breakdown in equities that feeds into heavy selling in AUD/USD, NZD/USD and GBP/USD.
If the numbers are in line with the consensus, I expect some relief for stocks and selling in USD.
