Over the next couple of days there is a barrage of US data that will likely be crucial for the markets, as it includes the last major data before the Fed’s October rate decision. After disappointing jobs data for September, the market is widely expecting the Fed to hold.
However, after the more hawkish than expected FOMC minutes, it’s clear that the focus is on inflation. If US September consumer prices come in hot, the market could reprice a rate hike in October. On the other hand, if inflation is cooler, then the market could completely price out a rate hike, dragging on the dollar and supporting gold in the process.
How the Market Will React to the Data
Markets will also be paying attention to Thursdays’ PPI figures, as they can offer insight into future inflation trends. Sometimes, it’s the PPI data that moves the market more than CPI, particularly if the latter is in line with expectations.
US retail sales coming out an hour later will also be in focus, as traders see if the US consumer remains resilient enough to weather higher prices and higher interest rates. Traders are likely to parse the data through the recent soft jobs figures that showed slowing wage growth, which suggests dwindling discretionary spending. The Fed needs to see a credible inflation threat if it will hike amid rising unemployment.
Moderation and “Second Round” Effects
Economists expect the headline inflation rate to accelerate as crude prices jumped from escalation in the Middle East. However, by itself, that might not be enough to move the needle on the Fed. The important aspect is whether higher energy prices are being passed through to the broader economy in what are called “Second round effects”
This is why Thursday’s data could be important, because if US consumers are under pressure, they might be less willing to absorb higher costs. Even if gasoline prices go up, if consumers’ finances are constrained, they might opt out of buying other things, reducing demand. Lower demand would translate into less inflationary pressure in other areas. This would be negative for the dollar because it signals fewer rate hikes and a weaker economy.
What the Market Is Looking For
The consensus is that US September CPI will accelerate to an annual rate of 3.6% from 3.4% a month earlier. This is mostly attributed to higher energy prices, as prices at the pump hit multi-month highs during the period. The core rate, however, is projected to remain unchanged at 2.4% on an annual basis. However, interestingly, the monthly rate is anticipated to cool to 0.2% from 0.3% a month earlier. The divergence between headline and core rate suggests that higher energy costs are not being passed through.
The next day, markets are expecting core PPI to accelerate to 4.7% from 4.6%, indicating higher wholesale price pressures. While this could mean that inflation might rise further down the line, that depends on whether businesses are able to pass the cost on to consumers. If demand remains weak, then producers might have to absorb the cost, keeping inflation low. US Retail sales are projected to slow to 5.2% from 6.0% a month earlier, implying a substantial reduction in consumer demand.
