[FrankTheTank]

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]

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]

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

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]

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]

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

Originally Posted by FrankTheTank »

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]

Originally Posted by forsearch »

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]

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!