Understanding CPI reports

Hi there

So the US CPI figures just came out today How does this affect the USD currency?

My thinking is that this CPI report is how government measure inflation. [B]Is that correct?[/B] With higher inflation does this usually means the Fed will increase interest rates [B](again is this correct?)[/B] and thefore with higher interest rates would this not mean the USD will gain strength. [B]Again is that correct?[/B]

Obviously if inflation rate is lower (CPI lower) then this has the opposite affect.

Am i understanding this correctly? If not then of course please point me in the right direction. :slight_smile:

Thanks again everyone (love this site!!)

Great questions and it’s good you’re aware of these data releases.

First and most important, remember that it’s ALWAYS context-dependent. It will never, ever be a set rule of, say, “If inflation readings come in one tenth worse than expected, USD will be sold and weaken” or anything along those lines. Its importance and relevance depend on the more major themes going on at the time.

Right now, the US quantitative easing program (you’ll see ‘QE’ referred to all the time) has been going on for a while and is now near the point where the FOMC (Federal Open Market Committee - the guys in charge of doing the QE) is looking to ‘taper’ their QE program. All that means is they’re going to start winding down this program to (hopefully) eventually be done with it forever.

QE is like giving the markets/economy training wheels to help get it riding its bike, so at some point those training wheels have to come off. This is generally a good sign for the US economy as a whole since it signals that improvement is taking place. Then, when we compare it to other countries who still have their own types of QE going on, it makes our currency look that much better.

Where this REALLY starts to take hold is in how it affects US treasury yields. Generally speaking, the taper will boost treasury yields, which will in turn boost the USD.

Now, where does CPI/inflation come in? Well the FOMC is looking to hit a certain target with inflation (a certain amount of inflation is seen as a good thing/recovering economy). However, they’ve been having some trouble with that. So if this continues to be a persistent problem, they might have to delay the tapering (do QE for even longer) which willl cause the opposite of what I just mentioned, so it’ll weaken the USD as the USD gets sold.

So CPI expectations on the website you look at might say like “0.1% Core CPI MoM, 0.2% CPI MoM” and then it comes in a little different from that…you might see an initial reaction in the markets (some algorithms are programmed to take quick trades automatically based on this data, which is why you see such ridiculously fast movements as the data is released…though usually it dies out just as fast).

However the bigger thing is that people are watching those types of data points with a more medium/long term perspective, so they’re not going just go balls deep immediately just because the data came in different than expected. They’ll take that into consideration of their bigger picture.

In terms of what happened today, the bigger worry is that the FOMC is meeting tomorrow and it’s a BIG day: people are waiting to see if they’ll officially announce their plans to taper and how they’ll go about it (if they do) which can have HUGE impacts in the market, so most people (particularly those who are going to be holding their positions like swing traders/position traders) don’t want to open up new positions with such a big impact event tomorrow. In fact, even this bank report mentions this exact phenomenon (and elaborates some other stuff)

So reactions to the data will be muted today (like you saw - it barely changed the market pricing at all). Remember, context is everything!!!

[B]So the too long;didn’t read version is this:
-QE is the name of the game
-Tapering QE helps boost USD, especially medium-long term
-Inflation has been a bit of an issue and isn’t reaching the targets they want
-If CPI readings come in weak, this means the issue may still be around and potentially add to tapering getting delayed further[/B]

Hope that helps :slight_smile:

Great answer. Thank you.

So with this announcement tomorrow I think i read at the moment the government are putting in $85bln a month. If they reduce this amount, are there forecasts by how much would make an impact i.e. $10bln or $20bln a month? How much is likely to boost the Treasury Yield and USD and what will be classed as not enough and therefore have the opposite affect as you mention.

[QUOTE=“Catabolist;534675”]

Great questions and it’s good you’re aware of these data releases.

First and most important, remember that it’s ALWAYS context-dependent. It will never, ever be a set rule of, say, “If inflation readings come in one tenth worse than expected, USD will be sold and weaken” or anything along those lines. Its importance and relevance depend on the more major themes going on at the time.

Right now, the US quantitative easing program (you’ll see ‘QE’ referred to all the time) has been going on for a while and is now near the point where the FOMC (Federal Open Market Committee - the guys in charge of doing the QE) is looking to ‘taper’ their QE program. All that means is they’re going to start winding down this program to (hopefully) eventually be done with it forever.

QE is like giving the markets/economy training wheels to help get it riding its bike, so at some point those training wheels have to come off. This is generally a good sign for the US economy as a whole since it signals that improvement is taking place. Then, when we compare it to other countries who still have their own types of QE going on, it makes our currency look that much better.

Where this REALLY starts to take hold is in how it affects US treasury yields. Generally speaking, the taper will boost treasury yields, which will in turn boost the USD.

Now, where does CPI/inflation come in? Well the FOMC is looking to hit a certain target with inflation (a certain amount of inflation is seen as a good thing/recovering economy). However, they’ve been having some trouble with that. So if this continues to be a persistent problem, they might have to delay the tapering (do QE for even longer) which willl cause the opposite of what I just mentioned, so it’ll weaken the USD as the USD gets sold.

So CPI expectations on the website you look at might say like “0.1% Core CPI MoM, 0.2% CPI MoM” and then it comes in a little different from that…you might see an initial reaction in the markets (some algorithms are programmed to take quick trades automatically based on this data, which is why you see such ridiculously fast movements as the data is released…though usually it dies out just as fast).

However the bigger thing is that people are watching those types of data points with a more medium/long term perspective, so they’re not going just go balls deep immediately just because the data came in different than expected. They’ll take that into consideration of their bigger picture.

In terms of what happened today, the bigger worry is that the FOMC is meeting tomorrow and it’s a BIG day: people are waiting to see if they’ll officially announce their plans to taper and how they’ll go about it (if they do) which can have HUGE impacts in the market, so most people (particularly those who are going to be holding their positions like swing traders/position traders) don’t want to open up new positions with such a big impact event tomorrow. In fact, even this bank report mentions this exact phenomenon (and elaborates some other stuff)

So reactions to the data will be muted today (like you saw - it barely changed the market pricing at all). Remember, context is everything!!!

So the too long;didn’t read version is this:
-QE is the name of the game
-Tapering QE helps boost USD, especially medium-long term
-Inflation has been a bit of an issue and isn’t reaching the targets they want
-If CPI readings come in weak, this means the issue may still be around and potentially add to tapering getting delayed further

Hope that helps :)[/QUOTE]

Finally someone who is competent with fundamentals on this forum.

Thank you sir. As long as they’re important to the university-educated big boys who have the money to move the market, they’ll be important to me.

Right now it seems the consensus is around $10bn, so variations from there will affect the USD accordingly (less than that and USD weakens, more than that and USD strengthens).

I can’t say by how much exactly and not to mention other factors will play a role (like how dovish or hawkish the tone is, any mention of next Fed chairman, etc.) but remember it’s all about expectations vs. outcomes. If you want further info, this report was great:

Scotiabank FX Update

NO TAPER. Not many people saw that coming.

Not even $5B or $10B. Amazing.