Prepare for a Heavy Dose of Inflation Readings

Oct 09, 2018
Gas pump prices

Inflation Readings Will Be the Focus This Week

This week will be all about inflation as several reports will force the issue over whether inflationary forces are building or remaining quiescent. September PPI, CPI, Real Average Hourly Earnings and Import Prices will all be revealed this week and if expectations come to pass it will show that inflationary forces are generally stable. Of all the price level reports the CPI will be the most anticipated but it doesn’t come until Thursday which will be after a boatload of new Treasuries are auctioned so that new supply should keep pressure on prices until we’re clear of the auctions on Thursday. If supply is taken down without too much indigestion (read higher yields), and inflation readings come as expected the array of risks appear tilted bullishly after what has been an unrelenting bearish run of late.



Short-Term Rates

Short-term Rates

Economic Calendar

Economic Calendar


Top Events of the Week Top 5 Events for the Week

OCT 9-12,  2018

1. September Inflation Readings — Wed./Thurs.
2. Treasury Supply — Tues/Wed./Thurs.
3. Sept. Real Average Hourly Earnings — Thursday
4. September Import Price Index — Friday  
5. October U. of Michigan Sentiment — Friday


1.  September Inflation Readings — Wed./Thurs.

This is easily the week of inflation discovery. In addition to the PPI and CPI releases we also get import price changes and the Real Average Hourly Wage series which will provide a look at the earnings power of the consumer after inflation. The most important release, however, will be the September CPI release on Thursday. Expectations are for September to be up 0.2% matching the gain in August.  The core rate (ex-food and energy) is also expected to increase 0.2% versus 0.1% in August.  On a year-over-year basis, CPI is forecast to drop 3/10ths to 2.4% from August’s 2.7% while core CPI YoY is expected to increase 1/10th to 2.3% versus 2.2% the prior month. While the YoY measures are above the Fed’s stated 2% benchmark the Fed’s preferred inflation measure, core PCE, remains slightly under 2% at 1.96%. That being said, the trend in PCE is towards 2%, and with decent wage gains continuing the Fed seems secure in the belief that inflation is moving toward its 2% benchmark. If the expected readings come to pass they won’t, however, indicate a leg higher in inflation and so it’ll be interesting to see how Treasury yields react given the back-up in the last week, that was in part inspired by some thoughts that inflation was beginning to percolate higher.


CPI Yoy vs Core CPI Yoy


2.  Treasury Supply — Tuesday/Wednesday/Thursday

In the final reopening auction series before the November refunding announcement the Treasury Department will offer $36 billion 3-year notes, $23 billion 10-year notes and $15 billion in 30-year bonds in this week’s shortened auction schedule. Additionally on the supply front will be bill auctions of 1-, 3-, 6- and 12-month maturities today. In all, with $24 billion of maturing securities, net new cash needed is $50 billion, the largest since 2011. The recent selloff across the Treasury curve may provide some incentive for the buyers needed to fill the new cash needed, or the yield back-up, if it continues early into this week, could serve to frighten investors until the selling momentum slows.


3.  Real Average Hourly Earnings — Thursday

As mentioned, this week is full of inflation readings that should inform investors over whether recent selling in Treasuries can be. in part, due to heightened concern over gathering inflation forces. One of the reports this week will be the year-over-year Real Average Hourly Earnings for September which is due on Thursday. The expected reading of 0.2% would indicate the consumer is not seeing much in wage gains after inflation and if the expectation comes to pass it could slow some of the inflation-inspired selling in Treasuries of late.


4.  September Import Price Index — Friday

Yet another price indicator this week is the September Import Price Index which is expected to show a monthly gain of 0.2% versus –0.6% in August. The YoY figure is expected to be 3.1% versus 3.7% in August. This series has been elevated of late given the rise in oil prices but the peak YoY reading was 4.9% in July so the expected 3.2% YoY print for September is another indication that peak mid-year readings are retreating in a host of price indices.


5.  University of Michigan Sentiment Surveys — Friday

The preliminary read on October consumer sentiment on Friday is expected to print at 100.5 compared to September’s 100.1.  The sentiment index has averaged 98.4 over the past year so an above-trend reading. The survey also contains two inflation measures that are watched by the Fed. Consumers expect inflation over the next year to be 2.7% and the longer-run expectation (5-10 years) moderately lower at 2.5%. The near-term inflation expectation has been edging higher of  late and the Fed will be sensitive if consumers continue to ratchet-up expectations and that could give them yet another reason to continue with the quarterly rate hiking schedule.





Technicals Investment Yield Ranges Over Last Year


US Treasuries

FHLB Agency Bullets

Mortgage Backed SecuritiesMunicipals

US Corporate - Financials

US Agency Swap Rates

 Source: Bloomberg





Tom Fitzgerald Signature

Thomas R. Fitzgerald

Director, Strategy & Research



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