- CPI y/y estimate: +8.1% (vs +8.5% previously)
- Core CPI y/y estimate: +6.1% (vs +5.9% previously)
The fact that almost all analysts have similar estimates pinned is what is going to be interesting. The headline reading is expected to soften while the core reading is expected to pick up even more in August. That could potentially set up for a mixed reaction, but Adam outlined the situation well in his earlier post here:
"Simply, if both are strong we'll see the US dollar strengthen; if both are weak, we'll see the dollar weaken.
Where it gets interesting is if they're opposing.
If headline is cool but core is hot, we will see some dollar strength. If headline is hot but core is cool, we'll see dollar weakness. That all depends on how much each of them miss but in general, I will defer to core because that's what the Fed is watching closest.
Overall, I get the sense that many traders are looking to trade a Fed pivot and signs of softness in CPI would play into that. The reaction would be strength in equities, adding to recent moment. In general, that will mean dollar softness."
As things stands, Fed funds futures show a 88% pricing for a 75 bps rate hike next week. I doubt whatever the case with the data later will impact that considerably. There might be shifts in pricing but ultimately, markets should settle on a 75 bps move as that has been quite clearly communicated by the Fed in the past few weeks.
The part that will be interesting is how the data will feed into the outlook in the coming months. Will this be the last of the series of 75 bps rate hikes? What about where the Fed sees the terminal rate, is that going to still be closer to 4%?
In other words, markets are looking for any signs of a slip up in the inflation numbers to capitalise on the Fed pivot. We're at that stage of the central bank tightening cycle now.
