Why is it important?
The range of estimates is important in terms of market response because when the actual data changes from what was expected, it creates a dramatic effect. Another important input in the market response is the distribution of forecasts.
In fact, although we may have a range of estimates, most predictions may be clustered at the upper end of the range, so although the data may come out within the range of estimates but on the lower end of the range, it can still create a dramatic effect.
Release of forecasts for CPI
CPI Y/Y
- 2.8% (6%)
- 2.7% (64%) – consensus
- 2.6% (30%)
CPI M/M
- 0.3% (54%) – consensus
- 0.2% (46%)
Core CPI Y/Y
- 3.4% (2%)
- 3.3% (66%) – consensus
- 3.2% (32%)
Main CPI M/M
- 0.3% (79%) – consensus
- 0.2% (21%)
Analysis
We can ignore the headline CPI as the market will focus on the headline figures. We can notice that the bias has decreased to the downside, so even if the 3.4% is within the range of estimates for Core CPI Y/Y, it would still count as an upside surprise .
The market is pricing in an 85% chance of a rate cut at next week's FOMC meeting and at least two more 25 bps cuts in 2025. We will likely need a very hot report to get them to cut down in December because they seem similar. Really want to deliver another cut before you stop.
If the data comes in lower than expected, it should strengthen the current market expectations and may even add a little more to the prices of 2025. In this case, we are likely to see sales in Dollar than SA, concentration in bonds and risk funds.
Estimated data should not change much in terms of market expectations but it is likely to trigger the same response as if the data came out lower than expected although with less magnitude.
Another hot report would be the worst case scenario, especially in the current context of stretched valuations and heavy risk taking. The complacency and animal spirits are very much like the mania of 2021.
Even if the Fed decides to cut next week despite a hot CPI, the market is likely to ease further with the rate cut expected for 2025 and could that will cause some risk disruption with the US Dollar generally rallying and risk assets being sold.
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