Are upside risks to next week’s CPI report brewing? | Forexlive

I love this market.

It’s all about the economic data right now with big moves coming on the heels of big releases. For a news trader, it doesn’t get any better than that.

Aside from trading headlines, it raises the stakes regarding pre-data information. Here’s a good thought on next week’s CPI from BMO fixed income strategist Ian Lyngen.

There is a growing sense that there is an upside bias versus the consensus of +0.4% for the core measure. The wildcard for the series is used car prices – which the anecdotes suggest surged in January. It’s an open question as to how the proxies translate into the CPI data during this particular release; as is often the case. An upside surprise of the magnitude required to shift the trajectory of the yearly pace is unlikely; so, the peak inflation narrative will most likely survive the week ahead. That said, an upside surprise would rekindle the debate regarding whether the structural rate of inflation has shifted higher in the wake of the pandemic. More relevantly for near term market pricing is the degree to which a stronger print would shift market pricing more in favor of a 5.50% upper bound as the pendulum of sentiment has swung hawkishly in the wake of the January payrolls report.

One of the anecdotes he’s referring to is the 2.5% m/m increase in the Manheim used vehicle index. The index only makes up about 4.5% of the entire core CPI report so it will need to punch above its weight to move the index.

I suspect the angst around CPI reflects the ebb and flow of market worries around data. Since the strong non-farm payrolls report, the market began to daydream about 6% rates and that was reflected in yesterday’s trading. There are some sober second thoughts about it today, including Barkin’s reminder today about the lagged effects of policy.

We are going to get a period of the Fed waiting-and-seeing what happens to inflation. Ultimately, the economy may stay strong and force them to hike again, but it won’t be in a straight line.

In any case, I think the takeaway here is that trading is all about the ebb and flow until the next big wave of data hits. The calendar is light until next Wednesday’s CPI report and we will go from there.