This is a market that has been so desperate in looking for any signs of a Fed pivot and any hints of cooler inflation since Jackson Hole in August. The reaction to the last two US CPI prints is a testament to that and the estimates today are showing that annual consumer price inflation is expected to cool further to 7.3% in November, down from 7.7% in October.
In any case, it will mark a significant climb down from the 9.1% peak seen in the June report. And if we do get anything sub-7%, it will be a field day for stocks and bonds. In turn, the dollar is likely to sink heavily across the board in another big wave of selling.
On the balance of things, the risks coming into today’s report is not all too balanced. It is definitely skewed more in favour of risk buyers i.e. dollar sellers in the event that we do see a softer figure than estimated.
On the other hand, if we do see a hotter number, one can expect that to fuel the opposite reaction i.e. buy dollar, sell everything else. But with the Fed in focus tomorrow, the kind of dollar rally may be hard to impose itself fully on markets especially since we have seen a softening in stance from Powell.
In other words, risk trades still can count on something else even if there is some disappointment today (which comes after four months of a fall in the annual inflation reading). A caveat I want to point out though is to watch for the dot plots tomorrow.
To keep things simple, any signs of softer inflation from the October report is a welcome development for risk trades. The kicker will be the pace in which inflation is seen declining. That might very well make a key difference between a 2-3% rally in risk trades and a 4-5% one before the Fed steps into play tomorrow.
As for a hotter inflation report, that is likely to keep markets more guarded and play it safe. After all, even with 7% inflation, we are still nowhere near the 2% target that the Fed is trying to work towards.