Why it’s important?

The ranges of estimates are
important in terms of market reaction because when the actual data deviates from the
expectations, it creates a surprise effect. Another
important input in market’s reaction is the distribution of forecasts.

In fact, although we can have a range of
estimates, most forecasts might be clustered on the upper bound of the
range, so even if the data comes out inside the range of estimates but
on the lower bound of the range, it can still create a surprise effect.

Distribution of forecasts for CPI

CPI Y/Y

• 2.7% (2%)
• 2.6% (53%)
• 2.5% (43%)
• 2.4% (2%)

CPI M/M

• 0.3% (3%)
• 0.2% (64%)
• 0.1% (32%)
• 0.0% (1%)

Core CPI Y/Y

• 3.3% (2%)
• 3.2% (74%)
• 3.1% (24%)

Core CPI M/M

• 0.3% (10%)
• 0.2% (81%)
• 0.1% (9%)

We
can ignore the headline CPI as the market will focus on the Core
figures. We can notice that the bias is skewed to the downside, so a soft report won’t be a surprise, unless the figures come out even lower than the lowest forecast.

Nonetheless, a soft report should increase the odds of a 50 bps cut at the upcoming meeting to something like 40 or 45%. In such a case, I expect the Fed to deliver a 50 bps insurance cut.

This article was written by Giuseppe Dellamotta at www.forexlive.com.