US CPI inflation likely firmed in August - TDS

Research Team at TDS, suggests that the US CPI inflation likely firmed in August with the headline index rising 0.1% m/m, leaving the inflation rate at 0.9% y/y vs 0.8% y/y in July.

Key Quotes

“The modest increase in headline price levels for August reflects lower energy and food prices, which should allow the core index to post a firmer 0.2% monthly advance. The energy sub-index likely fell on lower gasoline prices while food prices likely remained weak given anecdotal evidence from the Fed's Beige Book as well as declines in commodity indices.

We look for the core prices to accelerate to a 0.2% monthly gain following its soft 0.1% rise in July primarily on a pickup in the shelter component. Compared to year ago levels, core inflation likely stabilized at 2.2% y/y. If anything, we see downside risks to our monthly projections, particularly for the core index which could round lower to a 0.1% rise.

Foreign Exchange

We do not expect a large FX market reaction to the US CPI data. Indeed, we think it is notable how resilient the USD has been lately to weaker data as investors have shifted their focus to the December FOMC meeting as opposed to the one scheduled for next week.

All else equal, our expectation for some downside risks to the August CPI report implies some commensurate downside risks for the USD near-term. Here, USDCAD may be one of the more efficient ways to express this view as we also see some upside potential to the Canadian manufacturing sales data due out at the same time. There, we are increasingly of the view that the recent move higher in USDCAD off the 7 September low (1.2823) is starting to look stretched. This makes us better sellers of USDCAD rallies ahead of key resistance just below the 1.33 mark. We think risk/reward over the next several days favours a move down toward the lower boundary of spot’s trading range over the last several months.”