We're about to get an update on clothes prices - and it could fuel the current carnage in markets

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  • US stocks just logged the largest decline since February. Expected US stock market volatility spiked to the highest level since April.
  • Investors are watching movements in bond yields closely given they have weighed on risk assets over the past week.
  • US CPI data for September will be released today. The NAB explains why clothing prices could lead to an upside beat, potentially leading to a further increase in bond yields.

Global investors are nervous, particularly about the outlook for US inflation and bond yields. Specifically, will both continue to push higher.

That means any data on inflation will carry the potential to cause outsized moves in financial markets given the carnage seen across risk assets on Wednesday.

There just happens to be a major release on Thursday: US consumer price inflation (CPI) data for September.

While not the US Federal Reserve’s preferred inflation measure, that will matter little given skittishness among investors.

Both headline and underlying CPI is seen increasing 0.2% from August.

Without revisions to prior data, that would see year-ended headline CPI slow to 2.4% from 2.7% in August. For the underlying measure, that would see the annual rate tick up to 2.3% from 2.2% a month earlier.

Given US bond yields are perched at or near multi-year highs, any upside beat, particularly for the underlying reading, carries the potential to amplify the market moves seen on Wednesday, especially as underlying producer price inflation rose at the fastest pace since January last month.

On the balance of probabilities, Ray Attrill, Head of FX Strategy at the National Australia Bank, thinks the risks are slanted to the upside.

He explains:

Our model for core CPI is suggestive of an on-consensus 0.2% print for September. However, we view the risks to the upside given the possibility of a rebound in apparel prices after last month’s steep 1.6% fall. The fall in apparel prices almost accounted for half of the below consensus August CPI outcome, subtracting some 0.05% points off the monthly figure. Some reversal of the apparel price fall could accordingly add up to 0.05% points to our 0.2% model estimate and we cannot rule out the possibility this rounds up to 0.3%.

So clothing and accessories is the wild card that could lead to hotter-than-expected outcome.

While a consensus beat of 0.1% doesn’t sound like much, given the hyper-sensitivity to moves in bond yields over the past week, it could amplify investor concerns about the outlook for inflation and Fed policy, especially if US bonds sell off in response.

The inflation report will be released at 11.30pm AEDT.

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