US CPI due Wednesday. Here are the ranges of estimates (& why they’re crucial to know).

Take a look at the forecast range compared to the consensus average (“expected” in the screenshot above) for the key data points:

Regarding inflation:

• Core CPI 0.2% to 0.5% mo/mo
• Core CPI 3.3% to 3.5% y/y
• Previous food and energy 0.2% to 0.4% m/m
• Excluding food and energy, 3.5% to 3.8% on an annual basis

And while we're at it:

• Retail sales 0.0% to 0.7% per month
• Retail Sales Monitoring Group -0.4% to 0.5%

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Why is knowing these ranges important?

Data outcomes that fall outside of market low and high expectations tend to move markets more significantly for several reasons:

• Surprise Factor: Markets often price expectations based on past forecasts and trends. When data deviates significantly from these expectations, it creates a surprise effect. This can lead to a rapid revaluation of assets as investors and traders reevaluate their positions based on new information.

• Psychological influence: Investors and traders are affected by psychological factors. Extreme data points can trigger strong emotional reactions, leading to overreactions in the market. This can amplify market movements, especially in the short term.

• Re-evaluate risks: Unexpected data can trigger a re-evaluation of risks. If data performs significantly below or exceeds expectations, it could change the perceived risk of certain investments. For example, better-than-expected economic data may reduce the perceived risk of investing in stocks, causing the market to rise.

• Enable Automated Trading: In today's markets, a large portion of trading is performed by algorithms. These automated systems often have pre-set conditions or thresholds, which, when triggered by unexpected data, can trigger large-scale buying or selling.

• Impact on monetary and fiscal policies: Data that differs significantly from expectations can influence the policies of central banks and governments. For example, in the case of inflation data scheduled for today, weaker-than-expected data will fuel speculation about closer and deeper interest rate cuts by the Federal Open Market Committee (FOMC). A stronger (i.e. higher) CPI report would dampen these expectations.

• Liquidity and Market Depth: In some cases, extreme data points can affect market liquidity. If the data is unpredictable enough, it may temporarily imbalance between buyers and sellers, causing larger movements in the market until a new equilibrium is found.

• Chain reactions and correlations: Financial markets are interconnected. Any significant movement in one market or asset class due to unexpected data can lead to correlated movements in other markets, amplifying the overall market impact.