Import Price Index (MoM) (SEP) (12:30 GMT, 08:30 EST)
Expected: 1.0%
Previous: -0.3%

Import Price Index (YoY) (SEP) (12:30 GMT, 08:30 EST)
Expected: n/a
Previous: 1.9%

How Will The Markets React?

The release of the US import price growth could stir speculation that rising inflation pressures will prevent the Federal Reserve from cutting rates again on October 31st. The import price index for September is anticipated to surge 1.0 percent from the month prior after the figure dipped 0.3 percent in August. Much of the gains will likely be led by energy prices, as both oil and natural gas costs rebounded. Furthermore, with the US Dollar weakening so significantly, the price of other imports will pick up as well. Given the downside risks to growth and mounting inflation risks, the FOMC is in a very precarious position. Should they cut rates as a preemptive strike against a pronounced credit crunch and economic recession, or should they be worried more about inflation and the risk of moral hazard and leave rates steady? Currently, the markets are starting to bet on the latter, as Fed Fund futures are only pricing in a 38 percent chance of a 25 basis point cut at the end of October, down from 88 percent two weeks ago. As a result, if the import price data rises in line with or more than expected, Treasuries and US equities will both likely tumble, while the beleaguered US Dollar could find a bit of strength. However, if the news proves to be surprisingly weak, US markets may go back to pricing in a cut to 4.50 percent, which could send Treasuries, the Dow, and EUR/USD higher.

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Bonds – 10-Year Treasury Note Futures

Treasury note futures pushed down to test the recent lows and trendline support at the 108-12 level, as traders cut down their expectations for a rate cut on October 31st. The contracts are currently trading below their 50 SMA, but the previously mentioned support level could block sharp moves down towards the 200 SMA at 107-25. The US import price index release offers moderate event risk, with gains likely to fuel sell-offs in Treasuries, as signs of growing inflation pressures will diminish the probabilities of a Fed cut later in the month.

FX – EUR/USD

The EUR/USD pair has been weighed down over the past week amidst the release of stronger-than-expected US non-farm payrolls and signs that the European Central Bank had moved from a hawkish stance to a far more neutral bias. However, since the pair dropped down to test the 38.2 percent retracement level of the rally from 1.3568 – 1.4282 at 1.4011, EUR/USD has recovered quite a bit to take on the 1.4170 level. This came despite the release of fairly strong wholesale sales figures, which bode well for Friday’s retail sales report. Nevertheless, similar to the equity markets, traders appear to be hesitant to acknowledge the probabilities that the Fed will not cut rates until they hear the actual news or acquire additional evidence. The release of the US import price index may be only a blip on the radar and provide a bit of strength for the US Dollar on a short-term basis if the figures show gains in line with expectation. However, if import prices are greater than estimates, the news could push EUR/USD back down towards 1.4011 as signs of mounting inflation pressures will reduce the chances of a rate cut by the Fed in October.

Equities – Dow Jones Industrial Average

The Dow Jones Industrial Average continues to hold within tight ranges, with the daily charts showing a tight ascending channel formation. However, equities face event risk this week amidst the start of Q3 earnings releases, while Thursday’s import price index could add to some of the bearish sentiment seen in the markets. The figures are anticipated to rise, signaling rising price pressures in the economy. This would reiterate some of the commentary seen in the minutes from the September 18th FOMC meeting, as there are indications that many of the policy makers remain concerned about upside inflation risks, which could lead the central bank to opt to not cut rates again on October 31st. Such a move has the potential to send equities tumbling, but it appears that until traders actually see the next policy decision announced, they will continue to ride the wave of optimism.

Terri Belkas is a Currency Strategist at FXCM.