Is it a Good Thing to Pay More for Products?
Today at 8:30am, the Consumer Price Index will come out and let investors know how goods and services have behaved over the last month. As one can guess from the name, the CPI measures the change in the average price of goods and services. The changes are measured across all sectors, so the CPI number gives a holistic view of the US economy.
Positive CPI indicates that prices have increased more than analysts have expected, even in the face of uncertain economic times. In essence, this means that companies are confident enough that consumers will purchase their goods and services at higher rates. This indicates to traders that corporations may be doing better than expected, and tends to move the US Dollar higher.
This morning, traders will be looking for retail sales to surpass an estimate of 0.1%. If the number is greater than the estimate, US Dollar futures will immediately move higher, and barring unforeseen European news or other macroeconomic news, will set the stage for both the dollar index and the US equity markets.
Long-term investors should also keep in mind the consumer price index from the prior period. CPI come in every month, so long-term investors should keep track monthly snapshots of the American economy. Any aberrations or sudden drops could mean that corporations are getting skittish about the economy and are trying to quickly adapt to what they think their clients can afford.
Investors should also keep in mind that the holiday season may artificially bolster trends. If investors see a sudden drop in January CPI, they should not assume the economy is extremely bearish. However, if investors see a sudden drop this morning, then there may be underlying problems affecting corporations.
Consumers have a few options when it comes to understanding the US economy. The CPI number is one indicator that could help investors gauge where the economy is heading into the future. Investors should also keep up with the news via Benzinga Pro in order to stay on top of major developments that move markets.
Traders who believe that the Consumer Price Index will be positive might want to consider the following trades:
- Short US Equity futures by purchasing shares or put options. If you go with the options strategy, you could purchase a straddle just to reduce risk associated with the bet.
- Long the US Dollar Index, which typically moves inversely to equities and reacts positively to CPI. You could also short it against another currency like the Euro.
- Purchase option straddles of an ETF that tracks US equities like the S&P 500 SPDR (NYSE: SPY).
Traders who believe that CPI will not be positive may consider the following positions:
- Long US equity futures. The futures market typically relies on technical analysis for entry and exit points, so identifying the next support level may be useful.
- Short the Dollar Index, which is likely to move up if equities go down and will move down with a downbeat CPI.
- Long the Euro, which could go down as investors fear that Europe will be worse-off than the United States. Negative CPI may indicate to investors that European goods and services could be even worse than the United States' sales.
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