US: CPI to moderate to 2.8% from its July peak - TD Securities

"We expect CPI to moderate to 2.8% from its July peak while reflecting a 0.3% m/m gain boosted by energy prices and a solid core," TD Securities analysts noted in their recently published report.

Key quotes

"Outside of food and energy, we look for core CPI to print a strong 0.2% m/m, keeping core inflation at 2.4%. Underpinning another strong read are goods prices, held higher by a rebound in apparel and further gains in auto prices. Recent industry analyst reports continue to emphasize record higher vehicle prices while building momentum in import prices suggests scope for high import content products like apparel to post increases."

"FX: The US CPI report will have to contend with signals from the ECB, the BoE and ongoing Brexit headlines. The impact of the report should be clear, however, as an upside surprise would likely boost the USD while a miss would tug it lower. A 1-standard deviation surprise reflects a 0.5% move from consensus, suggesting moves to either 2.35 or 2.45% should be market moving. Over the past year, we have seen only two upside surprises and one downside surprise, which offers little guidance to the FX market. Still, the bias over the past year has seen the USD to trade lower on the monthly CPI data. For the DXY, the average move on the day sits around -0.12%."

"Alongside this dynamic, the first five minutes of trading have shown the DXY weaken more on a miss (0.24%) than rally on a beat (0.17%). The EUR has also been more responsive to the data than JPY or CAD so think it is best to follow the momentum in the wake of the ECB. If the EUR is holding firm into the data an on-consensus print (or miss) will amplify the gains, opening a clearer path to 1.18 over the coming weeks. However, a dovish ECB coupled with a beat increases the risk premium on the EUR, suggesting a push back towards 1.15."

"Rates: A firmer CPI report could reinforce rising price pressures following last week's firmer NFP wage growth. A firmer reading and the recent strength in oil should help support front-end breakevens, and we remain long 5yr BEs in our model portfolio. Given that markets are also pricing in 70% odds of a December rate hike and just 1.6 hikes in 2019, we think that any repricing in Fed rate hike odds due to expectations of strengthening price pressures should help flatten the curve. We continue to hold our 5s30s flatteners into the report."