US: Setting up for September CPI and retail sales - TDS

Analysts at TDS expect US headline CPI inflation to pick up to 2.3% y/y in September, with prices up 0.6% m/m.

Key Quotes

“Energy prices will exert an even larger contribution this month led by an 11% bounce in gasoline prices. This should be partially offset by lower natural gas and electricity prices however. Food prices could see stronger gains from crops affected by Hurricane Irma. Outside of food and energy, we expect price impacts to be minimal as was in the case in past hurricane episodes. Nonetheless, we expect a solid 0.2% print in the core CPI, keeping the core inflation rate stable at 1.7% y/y with upside risk for a firmer 1.8% pace. The September report will be widely scrutinized by Fed officials, particularly by those who are still on the fence over a December rate hike based on the past disappointment in inflation this year. A second consecutive 0.2% rise in core inflation will help build the conviction that price pressures are finally picking up as transitory factors dissipate.”

“Retail Sales: We expect a strong 1.8% increase in retail sales, reflecting a hurricane-induced surge in demand concentrated in motor vehicles. New vehicle sales massively beat expectations in September, hitting a 12-year high of 18.5m units, a 15% m/m increase, as consumer affected by Hurricane Harvey looked to replace their damaged vehicles. Industry estimates suggest that sales have further room to run; over 500k vehicles were damaged by the storms, propping up demand at least through November. The sharp jump registered in gasoline prices should also lend a boost to gasoline station receipts. Other categories such as furnishings and building materials could see a boost too, and hence we see upside risks to the headline print. The report would leave Q3 real PCE tracking near a 2% pace.”

“Foreign Exchange

This month's inflation print should set the tone for the dollar and the broader G10 over the coming weeks. For one thing, this release comes with a backdrop of weak inflation surprise momentum in the US over the past six months – at least when compared to the broader G10. Recent signs of stabilization in the inflation prints have helped the dollar to recoup some its recent losses, but core inflation will need to push higher from here to reinvigorate it. The takeaway from the minutes was the FOMC's concerns about the outlook for inflation, which leaves the dollar needing an upside surprise to shake the recent losses. For FX, we think the annual core figure will generate the most important signal and given TD's call for a flat reading there, we look for further weakness in the greenback. Near-term we like EUR and JPY and would look to use any dips as buying opportunities, with the DXY likely to retest the early-Sep lows.”