US September CPI Preview: Monthly core inflation is the figure to watch

US BLS will release the September CPI figures on October 13.
Markets expect core inflation to rise 0.5% on a monthly basis in September.
Markets are pricing in an 80% probability of a 75 basis points Fed rate hike next month.

Eren Sengezer FXStreet

The US Bureau of Labor Statistics will release the Consumer Price Index (CPI) figures for September on Thursday, October 13. Although the Fed uses the Personal Consumption Expenditures (PCE) Price Index data as its preferred gauge of inflation, market participants are likely to react more significantly to the CPI data simply because it's published two weeks before the PCE. Additionally, the CPI is widely seen as a better measure of what consumers observe with regard to changes in prices.

Investors expect the headline annual CPI to decline to 8.1% from 8.3% in August. The Core CPI, which excludes volatile food and energy prices, is seen edging higher to 6.5% from 6.3% in the same period. On a monthly basis, the CPI and the Core CPI are expected to arrive at 0.5% and 0.2%, respectively. Since the monthly figures are not distorted by the base effects, they are likely to paint a more accurate picture of core inflation.

Previous Core CPI (MoM) releases

It's worth noting that the September jobs report showed that Nonfarm Payrolls rose at a stronger pace than expected in September and that the Unemployment Rate declined to 3.5% from 3.7%, allowing the Fed to stay focused on battling inflation.

Market implications

When the data for August showed that the Core CPI rose by 0.6%, compared to the market expectation of 0.3%, the probability of a 75 basis points rate hike in September rose sharply and the US Dollar Index (DXY) gained 1.5% on a daily basis.

Currently, the CME Group FedWatch Tool shows that markets are pricing in a nearly-80% probability of one more 75 bps rate hike in November. Hence, the dollar's potential gains on a stronger-than-expected monthly core CPI reading are likely to remain limited. Also, following August's surprise, investors seem to have already prepared for a strong inflation report by forecasting a 0.6% monthly increase. At this point, only a monthly increase of between 0.8% and 1% in Core CPI could be significant enough for market participants to start considering the possibility of a 100 bps rate hike in November and trigger a fresh rally in the US Dollar Index.

Source: CME Group

On the other hand, a soft inflation report with the monthly Core CPI coming in much lower than analysts' estimate, between 0.2% and 0.4%, could open the door for a risk rally. In that case, Wall Street's main indexes could post impressive gains and the USD is likely to suffer heavy losses against its major rivals in the short term.

Nevertheless, unless there is a negative Core CPI print, investors are unlikely to scale back 75 bps hike bets, helping the dollar hold its ground after the initial reaction. FOMC policymakers made it clear that they will not overreact to one-off inflation data and that they will stay on the tightening path until they are convinced inflation is falling steadily.

Finally, in case CPI figures come in largely in line with analysts' projections, the DXY is likely to return to pre-release levels once the dust settles following the knee-jerk market reaction.

Author

Eren Sengezer

FXStreet

As an economist at heart, Eren Sengezer specializes in the assessment of the short-term and long-term impacts of macroeconomic data, central bank policies and political developments on financial assets.

AUD/USD bulls regain control above 0.6950 amid USD retreat

AUD/USD regains traction and extends the previous day's bounce from the weekly low, aiming for 0.7000 in Asia on Friday. The overnight pullback in US bond yields keeps the US Dollar below an 18-month high, which in turn offers some support to the pair. Meanwhile, hawkish RBA expectations also keep the major underpinned.

USD/JPY holds gains near 158.00 after Japan's weak Household Spending data

USD/JPY clings to gains around 158.00 after data showed on Friday that Japan's Household Spending fell for the ninth straight month, undermining the Japanese Yen. Meanwhile, the US Dollar remains depressed as the overnight fall in US bond yields counters a hawkish Fed and geopolitical uncertainties, could cap any downside in the pair.

Gold remains range-bound below $4,200

Gold has given up some ground after an initial bullish attempt to reach weekly highs, returning to below the $4,200 mark per troy ounce on Friday. The US Dollar’s strong upside momentum, combined with rising US Treasury yields across the curve, seems to keep further gains in the yellow metal under scrutiny.

Has Bitcoin really escaped the macro forces it was built to fight?

Over 17 years ago, Satoshi Nakamoto designed Bitcoin (BTC) on the back of a global financial crisis as an alternative to the global monetary system outside the control of central banks, governments and traditional intermediaries. This raises a key question: has Bitcoin really become independent of the macroeconomic forces it was built to challenge?

The Euro is not the sick man of Europe. France's bond market is

EUR/USD remains under pressure, near the 17-month low of 1.1161 reached on Monday. The pair has lost more than 7% since its yearly peak, as concerns over France's public finances increasingly weigh on the single currency. But behind the weakness of the Euro (EUR), the problem does not necessarily lie with the European economy as a whole.