US: Setting up for CPI – TDS

Research Team at TDS, suggests that the US inflation likely firmed in September higher energy prices and favorable base effects.

Key Quotes

“TD looks for a 0.3% increase on the month, lifting headline inflation to 1.4% y/y—the strongest pace in nearly two years. Energy prices likely rose firmly on broadly based increases across gasoline and energy services while food prices are expected to remain weak. The former component (energy) is on track to break out of deflation by January 2017.

We look for core CPI to post a solid 0.2% print, keeping core inflation stable at 2.3% y/y. The recent stability in oil prices and USD pressures suggest flat to higher core goods prices. Services prices are also expected to power ahead albeit at a more moderate pace than in August, when prices rose 0.3% m/m. This is partly due to some pullback in healthcare prices, which rose sharply in the prior two months. Though the bar is fairly low, evidence of firming price pressures are the necessary input for building a case for a December rate hike and will especially comfort the doves, as low inflation was cited as a reason for caution in September.

Foreign Exchange

Our expectation for CPI to print broadly in line with consensus should do little to move the needle on the USD. We think the recent appreciation has occurred at too rapid a rate, and we think that a moderate pullback or consolidation phase is due. A CPI miss is not likely to alter that dynamic as we think that market concerns are focused elsewhere such as on EUR and GBP. If there is a risk to the USD related to this print, we would think it would come in the form of a CPI downside surprise just given how well Fed expectations are priced. The dip should be shallow however as we do not think a CPI miss is enough to shake the Fed’s confidence in a hike later this year. Overall, we hold a neutral tactical bias for this report.”

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