Why does the US Inflation Index (CPI) strongly affect the markets and cause a decrease in trading rhythm before the announcement time?

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2022-07-15 12:49:46

Data on US CPI inflation will be published today, July 13, around 12:30 pm GMT (ie 19:30 in Vietnam).

Why is CPI important?

If the upcoming June inflation data falls, the market may be saved and have a recovery. On the contrary, if CPI increases further, it will adversely affect all markets and make investor sentiment unstable.

The report on the US CPI (Consumer Price Index: inflation indicator) of June will be published at 19:30 tonight (Vietnam time). This issue is especially important because it is the end of the second quarter and just before the meeting of the US Federal Reserve (FED) about raising interest rates. It is because of waiting for the “blockbuster” of CPI that the entire stock market is almost motionless, the trading volume on all exchanges is at the lowest level of the month. Earlier on last Friday (July 8,), the US jobs report was released with impressive numbers, but the market did not react positively and was almost “unchanged”. This shows that the upcoming CPI is the deciding factor.

If we are in the period of 2018 – 2019, not many people are talking about inflation. At that time, inflation only fluctuated around 2% per year. But now it is very different, inflation is at a record high of 8.6%. The US Federal Reserve has made it clear that their priority is to find ways to contain this number. Therefore, CPI will be the main factor affecting the next step of the Fed on interest rates, while interest rates will have a strong impact on investment markets.

Month-to-month percentage change of US CPI from May 2021 – May 2022
Source: Bureau of Labor Statistics
US CPI by year since 1965
Source: Bureau of Labor Statistics

The main factors contributing to the CPI

Real estate is probably the most sensitive market to changes in interest rates. This field also accounts for a very large proportion of the CPI scale (about 1/3). It’s like a three-way relationship. For example, interest rates have increased continuously since the beginning of 2022, during the same period, the Mortgage Refi Index decreased by 71.5%, the Mortgage Purchase Index decreased by 17.9%. Showing that high interest rates are a major barrier to trading in this market.

In the opposite direction, real estate accounts for 32.437% of the weight in the CPI inflation scale, including: Rent (rent) accounting for 7.275% and Owner’s Equivalent Rent (assumed rent if the landlord pays rent to himself) surname) accounted for 23.782%. Therefore, changes in rent or rent will have a strong impact on CPI. Many investors are hoping that as long as house prices do not increase for a few months, they can drag CPI down significantly, thereby “hoping” the FED will “hold hands” to reduce the intensity of interest rate hikes compared to the current one. However, the Index of the Housing Affordability Index of Americans decreased continuously since the beginning of the year, from 145.4 to 102.5. So one thing is for sure, rents are going up as most people can’t afford to buy houses and they will have to keep renting.

Price movements of components in the CPI in the first quarter of 2022

Another category that also contributes a fairly high proportion in CPI is Energy (energy price) accounting for about 8,255%. May data shows that energy prices still increased by about 6.1% compared to April. Data in June still show that this index continues to increase, so it is likely that this CPI will give energy inflation figures. The volume is higher than in May. Perhaps many people will wonder why oil and gas prices fell in June, why did they say they increased. The way to measure CPI is based on the average price of the month, so although last June the price decreased continuously, the average price of June was still higher than the average price of May.

The food sector (FOOD) is also not bright, this index accounts for 13.421% of the CPI but the food industry is facing a crisis of fertilizer supply because of the lack of gas raw materials. Potassium nitrate (Potassium Nitrate) used in fertilizers and food preservation is also facing a serious crisis because it depends largely on exports from Russia. Therefore, food prices are likely to continue to rise.

All of the above problems are problems of supply and logistics, so they cannot be solved just by raising interest rates, but they themselves need time to heal themselves. But the Fed still insists they will do everything to save it. The view of the Fed is to create the effect of “feeling poor” in the population. When interest rates increase, people’s assets (houses, stocks, pension funds …) will decrease in value, thereby people will feel that they are “poor” so it is necessary to limit spending and tighten belts. belly. This reduces consumer demand and will drag down the price of goods (in economics called the Wealth Effect Reverse). But the nature of interest rates cannot fix the supply problems mentioned above.

Anyway, the biggest hope of investors is that the CPI coming out this Wednesday will drop significantly. This hope is slim as the forecast number (forecast) is already around 8.8% (8.6 percent higher than last month). To restrain the Fed, we need a much lower number, for example

The worst case scenario if the CPI comes out even higher than the 8.8% expected figure, it is almost certain that the market will sell-off, because they know that the Fed will not hesitate and the figure of +0.75% interest rate will be put on the table. at the next meeting on July 27.

That’s why the market in recent days almost held its breath just to wait for the “blockbuster” CPI. In addition, this week there are also earnings reports (Earning Reports) of big banks, so that is also a factor that makes investors not dare to budge.

CHK Synthesis

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