Expect big market moves on Thursday.
In a taste of what’s to come, US equities are down around 10% since the previous CPI report a month ago. In it, inflation rose 8.3% y/y compared to 8.1% expected. The core reading was also hot at 0.6% m/m vs +0.3% expected.
Moments after the report, USD/JPY surged to 144.05 from 142.00. It continued higher to 145.90 before the Japanese government intervened to cap it. Even with that, it’s up to 146.98 today.
USDJPY moments after last month’s CPI
A similar-sized miss could easily lead to an equally-large reaction. Here are the consensus numbers:
- Inflation y/y +8.1%
- m/m +0.2%
- Core CPI 6.5% y/y
- Core m/m +0.5%
The data will be released alongside weekly jobless claims numbers, which will also be notable but certainly not the main market driver.
A month ago, traders were caught leaning towards a low number on the way to a Fed pivot. When it surprised to the upside instead, market participants were offside. That’s fresh in the mind of market participants and I suspect that even the bulls will want to see the numbers before making a move.
On the flipside, a material upside surprise (call it 0.2 pp on the monthlies) would put in play a higher terminal Fed rate. With other global central banks set to pause, that sets up expanded rate differentials in favor of the US dollar.
Ultimately, I think this is a trade where you go where the data takes you. A low reading could cause a squeeze higher while a high reading could spark a disorderly breakdown in equities that feeds into heavy selling in AUD/USD, NZD/USD and GBP/USD.
If the numbers are in line with the consensus, I expect some relief for stocks and selling in USD.
