CPI July Result -> Treasury Yield Surge -> CPI August Surprise?

We are expecting the both the CPI (Consumer Price Index) and Core CPI for August on 13 September 2023.

For July Consumer Price Index report, it showed that prices rose 3.2% year over year, a tick below the 3.3% forecast by economists, according to Dow Jones.

The 0.2% month-over-month change in prices was in line with estimates. Shelter inflation, which is seen by many economists as lagged data that will fall sharply in the coming months, was the biggest contributor to the increase.

U.S. Treasury yields climbed on 10 Aug 2023 (Thursday) as the July consumer price index report provided another encouraging sign that inflation is slowing down.

The 10-year Treasury yield was up by nearly 10 basis points to 4.102%. Yields move opposite of prices, and a basis point is equal to 0.01%.

Here is how the indexes have performed when U.S. 10-year Treasury yield surge as CPI lower than expectations, in this article, I shall explain how we can trade when that happen by taking lesson from past CPI announcement.

Treasury yields, often viewed as a barometer of economic health, respond to various economic indicators, with CPI being one of the most influential.

The Consumer Price Index, published by the Bureau of Labor Statistics, measures the average change over time in the prices paid by urban consumers for a basket of consumer goods and services, including food, clothing, shelter, and healthcare.

It is a crucial indicator for inflation, reflecting the purchasing power of consumers. When CPI rises, it indicates that prices are increasing, which can have far-reaching consequences for the economy.

The relationship between CPI and bond yields, particularly Treasury yields, is a fundamental aspect of fixed-income investing.

Treasury yields represent the interest rate paid by the U.S. government on its debt obligations. These yields are influenced by several factors, including economic growth, inflation expectations, and market sentiment.

As we can see that the yield surge when CPI for July was announced and Nasdaq react by trading downside.

We can see that it has been going downside since the yield have been going up with small corrections only. I would observed this as a significant impact on Nasdaq if the CPI for August were to top expectations.

Before we really look at how Fed will use the CPI data and yields to determine its rate hike campaigns, I feel that this is important for us to prepare our trading plan accordingly.

If I were to look at the S&P 500 reaction to the last July CPI, it seem like it is trading rather flat when we see a yield surge.

S&P500 close with almost flat (+0.03%) but it decline by 0.70% one day before the July CPI was announced and also fall by 0.11% one day after the July CPI was announced.

Similar to what we see in Dow Jones, it is trading rather sideways and almost flat when yield surge on 10 Aug 2023 after July CPI was announced.

Dow Jones actually gain 0.15% on 10 Aug but suffered a loss of 0.54% one day before (09 Aug), it gained 0.30% on 11 Aug 2023.

So I would monitor stocks in the Dow Jones this round on 12 Sep 2023 before the August CPI as I would expect similar CPI readings to be below expectations.

But it is worth looking at the yield if it will continue to rise.

As mentioned above, I am expecting the CPI to come in below expectation of 3.60% and core CPI to be lower than 4.30%.

I believe we might see the same behavior on the treasury yields as investors might be buying up bonds to defend against any uncertainty.

But if we have a CPI surprise, we might see more investors buying newly issued bonds and increased income from their fixed-income investments.

Existing bondholders may experience a decrease in the market value of their bonds as yields rise. This can lead to capital losses for those looking to sell their bonds before maturity.

I think it would be advisable to have Portfolio Diversification: In response to rising yields, we may consider diversifying our portfolios to include assets that tend to perform well during periods of inflation, such as stocks or commodities.

Appreciate if you could share your thoughts in the comment section whether you think CPI August will be a surprise considering that treasury yield prices have been going up, this is normally a sign that CPI will beat expectations.

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.