"Market Leading Indicator" Forecast: Tonight's US CPI Will Exceed Expectations
Market leading indicators predict that the year-on-year increase in the U.S. CPI for August will be slightly higher than expected, estimated at 2.91%. Morgan Stanley analysts point out that this data may push up the dollar, as historical data shows that unexpected increases in CPI are usually associated with rises in the dollar index. CPI swap rates reflect investors' real bets on inflation, and in the past ten CPI releases, eight have accurately indicated the direction of the actual data. Although inflation in the service sector is slowing, the impact of tariffs will be more significant
Regarded as a "leading indicator" of inflation data, the upcoming U.S. August CPI year-on-year increase is expected to be slightly higher than the market consensus, bringing moderate upside risks to the dollar.
According to news from the Chase Trading Desk, Morgan Stanley analysts Molly Nickolin, Andrew M Watrous, and others released a report on the 9th stating that the pricing of CPI inflation swaps indicates that the market-implied year-on-year growth rate of the overall CPI for August will be 2.91%, slightly above the median forecast of 2.90% from economists surveyed by Bloomberg.
This small discrepancy suggests a potential unexpected upside in the inflation data. The report notes that any potential upward data could further boost the dollar. Historical data also shows that unexpected increases in CPI are usually positively correlated with rises in the Dollar Index (DXY).
The report also indicates that in the past ten CPI data releases, the pre-market pricing of CPI swap rates accurately predicted the direction of actual data compared to market expectations in eight instances.
CPI Swap Rates Indicate Inflation Upside, Tariff Impact May Be More Significant
As a forward-looking market indicator, CPI swap rates reflect investors' true bets on inflation.
Currently, CPI swap rates expect the year-on-year increase for August CPI to be 2.91%, with a month-on-month increase of 0.38%. Both figures are above the consensus of economists. The median forecasts from economists surveyed by Bloomberg for the year-on-year and month-on-month increases in CPI are 2.9% and 0.3%, respectively.
At the same time, Morgan Stanley's Diego Anzoategui predicts that the year-on-year increase for August CPI will reach 2.92%, also slightly higher than the pricing in the swap market. The bank's economists believe that although inflation in the service sector, such as airline ticket prices and dental services, is slowing down, the impact of tariffs will be more significant than in previous months.
It is worth noting that the PPI, which will be released before the CPI, may not have a significant impact on market expectations. The report points out that the volatility of monthly PPI readings is too high to serve as a reliable signal for predicting the same month's CPI.
Historical Trends Suggest Moderate Upside for the Dollar
Morgan Stanley notes that the gap between CPI swap rates and the median forecasts from economists suggests a potential upside surprise of 0.06 standard deviations in tonight's data.
Historically, unexpected CPI data is closely related to the movement of the dollar. The report states that a one standard deviation unexpected CPI data usually accompanies a roughly 0.4% movement in the same direction for the Dollar Index.
Based on this model, the potential upside of 0.06 standard deviations this time would correspond to a 0.03% increase in the Dollar Index within one hour after the data is released. Last month's market also validated this correlation. Data shows that on August 12, the U.S. dollar index fell sharply due to the July CPI data being lower than expected (consistent with the direction of the CPI swap rate at that time).
If inflation data indeed exceeds expectations and strengthens the dollar, the reactions of different currencies may vary. The report also emphasizes that on days when CPI surprises to the upside, the Swedish Krona (SEK) typically performs the worst against the U.S. dollar.
According to Morgan Stanley's estimates, a 0.06 standard deviation upside surprise could lead to a 0.04% decline in SEK/USD within one hour after the data is released. In contrast, the Canadian Dollar (CAD) shows the most resilience in similar situations, with the smallest decline against the U.S. dollar.
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