CPI Report - Equities Go Up with Bad Number?

[FrankTheTank 10]

Sorry for my ignorance, but I noticed today that the CPI number came out worse then expected according (0.1 vs. 0.2).

 

With other news reports, I noticed that dow futures usually go down with a "bad" number. Example, housing data comes out bad, market goes down. However, today equities shot up with a bad number?

 

Is this because investors think the fed. will cut rates again?

 

Does this mean a bad CPI report will ALWAYS create a rise in equities?

 

Are there any other reports that act in this manner (which is conter-intuative at first) and why?

 

Thanks for any help!

[OAC 10]

CPI today was better than expected, it came out 8:30am EST an hour before NYSE opening. You kind of know the number may be good before it came out because the big guys slam the globex futures down to clean out all the stops of the people who were long very early in the morning before the numbers came out.

[FrankTheTank 10]

When you say "good" please clarify. According to Forex Factory

 

  Quote

The Consumer Price Index (CPI) measures the rate of inflation (i.e., the rate of price changes) experienced by consumers when purchasing goods and services. A rising trend has a positive effect on the nation's currency. The primary objective of the central bank is to achieve price stability; when inflation rises above an annualized rate of approximately 2%, they will respond by raising interest rates to bring prices down. Higher interest rates attract foreign investment, thus increasing demand for the nation's currency. CPI is one of the most closely watched indicators and will usually have a high impact upon release.

 

I take this to mean numbers that are higher then expected are good for the US and numbers that are lower then expected are worse for the US.

 

I am probably missing something.....

[mister ed 10]

Frank - in a nutshell, a high, or higher than expected, CPI is considered 'bad' while a low, or lower than expected CPI, is considered 'good'. High inflation will give the central bank (the Fed in this case) a reason to consider raising interest rates. Higher interest rates means the risk-free rate of return is higher, which means that equities have to generate higher returns in order to remain attractive to investors, all else being equal then equities (and hence the equity index futures) will be sold on a high inflation number result.

 

The opposite occurs for a low or lower than expected inflation result - that is, a low inflation result (like today's 0.1 vs expectations of 0.2 - i.e. lower than expected) means the central bank will be much less likely to consider increasing interest rates, thus making equities, and therefore equity future indices, relatively more attractive to investors. Which is why, in a nutshell, the equity index futures rallied as soon as the CPI numbers were released to the market today.

[OAC 10]

You know how the street is earning-drivened. Higher interest rate increase corporate borrowing cost and therefore reduce corporate earnings.

[Guest forsearch]

  FrankTheTank said:

 

I am probably missing something.....

 

 

According to Economic Calendar at Barron's from Econoday the numbers were within the range of the market consensus, and better than expected.

 

April 2008 CPI Consensus Range Actual

CPI - M/M change 0.3 % 0.1 % to 0.4 0.2 %

CPI less food & energy 0.2 % 0.1 % to 0.4 0.1 %

 

The market is looking at the CHANGE in the CPI and Core CPI (stripping out food and energy) from month-to-month.

 

CPI is an inflationary measure; higher the number, the more inflationary it is. The lower, the better. Given the recent prices of commodities today's number was better than expected.

 

-fs

[mister ed 10]

  forsearch said:

According to Economic Calendar at Barron's from Econoday the numbers were within the range of the market consensus, and better than expected.

 

Good info and link thanks fs. I admit I use Forex Factory as its a nice summary, but that Econday site looks great.

[FrankTheTank 10]

Okay. One last question. I note that forex charts show the US Dollar losing strength with this lower then expected number.

 

Typically, bad US numbers mean equities go down and the USD goes down. With this months CPI number, equities went up and the US dollar went down.

 

The question is, why did the dollar take a hit with this report and are their any other news reports like CPI where the dollar will move in the opposite direction of equities?

 

Thanks!

[OAC 10]

Higher interest rate in the U.S. attracts more foreign investors to invest U.S. Treasury Securities and therefore strengthen the dollar because there is more demand for the dollar. Lower return on Treasury Securities will drive investors elsewhere to seek higher returns

[FrankTheTank 10]

  OAC said:

Higher interest rate in the U.S. attracts more foreign investors to invest U.S. Treasury Securities and therefore strengthen the dollar because there is more demand for the dollar. Lower return on Treasury Securities will drive investors elsewhere to seek higher returns

 

So the final piece of the puzzle (for me) is how does CPI report relate to interest rates?

[Guest forsearch]

Keep in mind that yields on treasuries are inverse to their prices (and vice versa).

 

Look at the reaction in the 10yr note and 30yr bond prices after the CPI, and then after RTH opened for the equities.

[OAC 10]

  FrankTheTank said:

So the final piece of the puzzle (for me) is how does CPI report relate to interest rates?

 

There is inflation because too much money is chasing the same amount of goods. Now higher interest rate will slow down borrowing by individuals and businesses, therefore reducing the amount of money available in the economy

[FrankTheTank 10]

Thanks again to everyone. So in a nutshell:

 

Higher then expected CPI = equities fall

Lower then expcted CPI = equities rally

 

  Quote

Inflation (along with various risks) basically explains how interest rates are set on everything from your mortgage and auto loans to Treasury bills, notes and bonds. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates. The effect ripples across stocks, bonds, commodities, and your portfolio, often in a dramatic fashion.

 

By tracking inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform. Over the long run, the bond market will rally (fall) when increases in the CPI are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.

[OAC 10]

  FrankTheTank said:

Thanks again to everyone. So in a nutshell:

 

Higher then expected CPI = equities fall

Lower then expcted CPI = equities rally

 

And have your eyes glued to your screen on Fed day. :o

[FrankTheTank 10]

I have noticed sometimes that when the fed. cuts rates as expected, equities actually fall.

 

Is this the old "buy the rumor, sell the news" at work?

[Guest forsearch]

Yeah, at times the expected move has already been priced into the market.