US October CPI - A Primer

Tomorrow at 13:30, we get the latest inflation data which will give us a clearer picture of how the US economy is progressing in the face of persistent supply-chain bottlenecks and generally surging prices. The expectation is for a YoY increase of 4% (on the Fed's preferred Core Measure). The headline number is expected to decrease slightly to 5.3% from 5.4% a month earlier. 

Let's get this out of the way right at the start, I expect the MoM number to come in at around 0.3-0.4%, which will be about in-line with market expectations and will probably not cause much excitement - except perhaps for gold. I wrote a short piece on gold earlier linked here.

It's been interesting to watch bond markets today - where bond yields across the curve are lower (perhaps as a result of risk aversion into the inflation report?), but real yields have also dropped to all time lows. 

The 30y is down a chunky 8bps, it's another day of curve flattening. 

Source: Refinitiv

Since Friday's payrolls report (and last Wednesday's FOMC), there have been a lot of Fed speakers all coming out and trying to downplay the hiking story a bit more. The payrolls report was a good news story for markets since it showed supply issues within the labour market were abating slightly at the very least. This means that inflation pressures in the labour market should ease off a little bit. 

Source: Bloomberg (John Authers) 

One particular headline which did catch my eye was this one though: 

Most Recent
	09 Nov - 18:35:29	RTRS		FED'S KASHKARI: WHETHER IT'S A DEMAND SHOCK OR A SUPPLY SHOCK, EITHER WAY, THE STORY SHOULD BE TEMPORARY

We all know Kashkari is pretty dovish, but this is interesting to me as it seems the Fed is disregarding the cause, it doesn't matter either way - inflation is transitory. We also had warnings though about asset prices, China real estate and stable coins though so take everything with a pinch of salt for the time being. 

The chart below is interesting though, on the supply side, concerns about bottlenecks and general deliveries are surging. This is shown but he blue line but also by the white line in business prices. The prices one is arguably the more concerning longer-term. How long is it before these higher inflation concerns get baked in? 

Source: Bloomberg (John Authers) 

So, for the report tomorrow, I am thinking the consensus forecast is likely to be correct, and I'd be surprised to see a bigger inflation number - there's little to suggest to me that there has been a sudden change in conditions since last month. 

What's the trade? 

Unlike that messy payrolls report last week where at first it was a demand story, then a supply story then a mix of the two, this should be very clear cut. 

If the inflation forecast beats, then get long USDs, and if it misses, get long something like a CADUSD or NOKUSD - i.e. the inflation plays. (Short USDRUB is another nice option here where the conventionality of the Russian Central Bank should keep RUB safe from severe weakness). 

The other trade I really like in the event of an in-line number is long gold. If we are in-line the Fed has no reason to deviate from current course, but inflation is still running at a hefty pace and gold as an inflation hedge should do pretty nicely. A big heart on inflation is tricky for gold as you have counteracting effects - firstly, it would fall as the hike would be expected sooner, but then higher inflation drives demand for gold... tricky one. A miss on inflation is similarly tricky. But status quo should be enough for gold to breakout in my view. 

(Happy to delve into greater explainers on this rather nuanced gold view if any takers...) 

That's all for the preview. NET NET: I expect an in-line number and no excitement in any FX except perhaps for gold.