Why it's important?
The ranges of estimates are important in terms of market reaction because when the actual data deviates from the expectations, it creates a surprise effect. Another important input in market's reaction is the distribution of forecasts.
In fact, although we can have a range of estimates, most forecasts might be clustered on the upper bound of the range, so even if the data comes out inside the range of estimates but on the lower bound of the range, it can still create a surprise effect.
Distribution 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%)
Core CPI M/M
- 0.3% (79%) - consensus
- 0.2% (21%)
Analysis
We can ignore the headline CPI as the market will focus on the Core figures. We can notice that the bias is skewed to the downside, so even if the 3.4% is inside the range of estimates for Core CPI Y/Y, it would still count as an upside surprise.
The market is pricing an 85% chance of a rate cut at the next week's FOMC meeting and at least two more 25 bps cuts in 2025. We will likely need a very hot report to force them to skip the December cut as it looks like they really want to deliver another cut before pausing.
If the data comes lower than expected, it should strengthen the current market expectations and might even add a bit more to the 2025 pricing. In this case, we will likely see a selloff in the US Dollar, a rally in bonds and risk assets.
Data in line with estimates shouldn't change much in terms of market expectations but will likely trigger the same reaction as if the data came out lower than expected although with less magnitude.
The worst case scenario would be another hot report, especially in the current context of stretched valuations and heavy risk taking. The complacency and animal spirits resemble a lot the 2021 mania.
Even if the Fed decides to cut next week despite a hot CPI, the market will likely scale back further the rate cuts expectations for 2025 and that could trigger some risk aversion with the US Dollar rallying across the board and risk assets being sold.
This article was written by Giuseppe Dellamotta at
www.forexlive.com.
