US July CPI set to Drop (Finally)

With the Fed saying it will be more data-dependent, many stock traders are hoping the data will
support a less hawkish stance to keep the summer rally going. But will the CPI come below
expectations?
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One more CPI before Sept hike decision

It all comes down to how the markets think the Fed will react, but that has to be considered in the context of the schedule. The Fed doesnt meet next until the latter half of next month (Sept), meaning that they will also have August inflation CPI figures to potentially re-calibrate the markets before the next meeting. Therefore, July CPI data, while a highlight this week, might not have such a lasting effect on the markets.

Media attention will likely be on the headline CPI figure, which is forecast to drop to a monthly change of 0.2% compared to 1.3% m/m last time. That would imply an annual inflation rate of 8.7% compared to 9.1%. But this wouldnt be the first time that inflation paused for a month, before surging forward again. Just one data point does not make a trend.

Gas prices lag makes ‘core’ CPI more important

Forecasters are pointing to the recent drop in crude prices in June which were reflected in prices at the pump through July (but note that gasoline price sampling happens earlier in the month, so not as much of this effect might show in the data). Forecasters have been adjusting their estimates lower as data came in and the Cleveland Feds nowcast dipped. But the Fed cares about the core inflation rate, which is also expected to show a deceleration to 0.5% m/m from 0.7%. Not as dramatic as the headline data.

Where things are a little more complicated is annual core inflation is expected to accelerate to 6.1% from 5.9% previously. And that could keep the Fed charging ahead with hikes even if the headline number comes in below expectations. Both headline and core inflation would likely have to fall before the markets get a substantial boost to optimism.

USDJPY upside halts at SMA/trendline cluster

The recent bounce from 131 has halted at the 50-day average and an ascending trendline. A strong cluster has now been forged. Interestingly, the 38.2% retracement lies around the same territory.

The USD/JPY pair is set to slide lower if the cluster repels bulls. Breaking above will increase the probability of extending towards 140.00. But if bears prevail, the weakening of 130.40 would open the door to 126.30 and the 138.20% Fibonacci expansion at 121.

Key Takeaways

The markets expect inflation to have cooled down in July, but the report might not have such a lasting effect since the next meeting isnt until later in September. Media attention will likely be on the headline figure, but the Fed will take the core inflation rate into account when deciding whether to hike aggressively or not.

Economists have been lowering expectations due to the drop in crude prices, but inflation is expected to remain elevated nevertheless. This makes optimism more susceptible to the core than the headline.