Preparing For Tomorrow’s CPI Reading: Market Braces For Volatility, Bitcoin Open Interest Surges

Markets await the highly anticipated September CPI data release due Thursday. Consensus leans towards month-over-month growth and a CPI surprise higher could take yields higher and risk assets lower.

Relevant Past Articles:

• 7/13/22 - Inflation: Enemy Number One

• 8/9/22 - July CPI: What To Watch For? 

• 9/13/22 - Higher CPI Inflation Forces Markets To Reprice

Markets Prepare For CPI Surprise 

The U.S. Producer Price Index (PPI) data was released today, a day before the highly anticipated consumer price index release tomorrow morning. In short, it’s not a good sign for those expecting a below-consensus CPI beat tomorrow. Although headline PPI is coming down, the month-over-month (MoM) growth came in higher than expected at 0.4% (consensus: 0.2%) and the headline annual change came in at 8.5%. PPI has less of an impact on immediate market moves compared to the CPI as it doesn’t account for inflationary costs being passed on to the end consumer. Still, it’s an inflationary measure that gauges if businesses are facing accelerated prices and tends to move in the same direction as CPI. 

CPI consensus is 0.2% MoM so an overshoot of even 10 basis points could send the market into another significant downwards move, killing any Federal Reserve pivot hope left. 

This is not the only sign in favor of a higher-than-consensus CPI print tomorrow. Previously, we mentioned the Cleveland Fed Inflation Nowcasting data which projects a 0.32% headline CPI MoM change and 8.2% headline annual change. That said, 17 of the last 19 nowcasting forecast reports were actually under the CPI reading. Recently this tool has been closer than most consensus forecasts but consistently underestimates the actual CPI data. When the more conservative CPI forecasters are predicting a consensus beat, tread cautiously. 

Although PPI data can give us an idea of the CPI direction, they don’t move the markets like CPI data has over the last year. A key metric to watch for what the market is thinking is the U.S. 2-year Treasury yield, currently just shy of 4.3%. As of today, the latest upward momentum is stalling and is on pause, which can signal that the market is not quite ready to buy the latest Fed comments on rate hikes to 4.5% until they see the CPI print. 

At the time of writing, the latest CME probability market data shows nearly a 90% chance of a 75 basis point rate hike in November — and a much less certain picture of what happens in the December meeting. The highest probability as of now is another 50 basis point rate hike to come. The range of probabilities and uncertainty is consistent with what we’re seeing in the 2-year Treasury yield. All of that can change rather quickly, especially with the volatility in yields we’ve seen over the last month.