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Shoppers walk into a department store in Austin, Texas. Traders and investors are awaiting Thursday’s consumer price index report for July.
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The financial market’s savviest inflation traders are bracing for Thursday’s release of the U.S. consumer price index for July to reaffirm that inflation is on a rocky road toward 2% over the months to come.
Traders of derivatives-like instruments known as fixings expect a 3.2% annual headline CPI rate for last month, just a bit under the 3.3% median estimate of economists polled by The Wall Street Journal and up versus June’s 3% reading. The monthly core CPI rate, which strips out volatile food and energy prices, should either match economists’ 0.2% median estimate or come in slightly less than that, said traders and other analysts, depending on whose calculations are used. The annual core rate is expected to be 4.7% versus 4.8% in June, according to The Wall Street Journal poll.
Source: Bloomberg. The chart reflects fixings traders’ expectations for the headline year-over-year CPI rate, as of the “maturity” date shown in the first column. The “forwards” column reflects the year-earlier period which serves as the starting point for calculations on the annual headline CPI rate.
The U.S. is settling into what many see as the final mile of the road to reducing inflation back toward the Federal Reserve’s 2% target, though the path is not expected to be smooth through at least September. Higher gasoline prices are playing a major role in that and are nudging up the expectations of fixings’ traders, who now expect an annual headline CPI rate of 3.6% for August and almost 3.4% for September.
“I think we’re at the start of making the kind of progress the Fed wants to see to get inflation down to 2%,” said Omair Sharif, founder and president of research and analysis firm Inflation Insights in Pasadena, California. “It’s going to be bumpy, but we’re on the right path to getting inflation down to 2% without any more Fed action.”
Sharif said he expects the market-implied monthly core CPI rate to be 0.2% for July, 0.13% for August, and 0.14% for September, though he has less confidence in the two final sets of numbers until it’s known how higher gasoline prices will play out this month.
Read: Why are gasoline prices going up? Saudi production cuts matter.
Data from China on Wednesday showed the world’s second-largest economy tipping into deflation, offering at least a glimmer of hope that can translate into easing price pressures in the U.S. However, according to trader Gang Hu of WinShore Capital in New York, it could take about a year before China’s declining consumer prices feed into the U.S. CPI, given the long and uncertain lags between the two.
See also: China Is Slipping Into Deflation. Beijing Has Lost the Private Sector.
“The expectation has been that inflation would be coming down a lot quicker, but energy is starting to turnaround and is going to make an impact,” said Patrick Ryan, portfolio manager and head of multi-asset solutions at Madison Investments in Madison, Wis., which manages around $22 billion in assets. “Getting inflation down from its 9.1% peak last year was the easy part. We are now getting to the hard part of trying to get inflation back below 3%, which is difficult given a strong labor market, high consumer spending, and the turnaround in oil.”
On Wednesday, investors moved into wait-and-see mode ahead of Thursday’s CPI report. Treasury yields were mixed during the New York afternoon, while all three major stock indexes
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