Negative CPI, Positive Job Numbers. Is the Economy Healing or Not?
The consumer retail sector is one of the few sectors that can help investors identify subtle macroeconomic trends. For the most part, consumer retail companies are driven by consumer demand. In bad economies, private citizens tend to spend less money, while in good economies, they are unafraid of spending more. As such, certain economic data based on consumer retail trends can help investors map out the general economy's future.
Today at 8:30am, US Consumer Price Index will come out and let investors know how the consumer retail industry is doing. Consumer retail includes companies such as Wal-Mart (NYSE: WMT), Priceline.com (NASDAQ: PCLN), and Movado Group (NYSE: MOV). These companies essentially reflect how the average Korean business is modifying its prices to accommodate consumer demand.
Positive CPI indicates that companies are charging consumers more than previously thought, even in the face of uncertain economic times. Ultimately, it signals that consumers are able to pay more for the same goods. This indicates to traders that things may be better, after all, and tends to move the equity markets higher. In pre-market trading, the currency will move higher along with equities as well.
This morning, traders was hoping for the US CPI to surpass an estimate of 0.2%. Unfortunately, the CPI number came in at 0%. On the other hand, Core CPI met expectations, coming in at 0.1%. Although this was relatively negative news for the retail sector, positive jobless claims bolstered the equity markets and prevented significant downturns. Likewise, positive earnings announcements by Morgan Stanley (NYSE: MS) and Bank of America (NYSE: BAC) supported the move up.
Long-term investors should also keep in mind the CPI from the prior period. The CPI number comes in every month, so long-term investors should keep track of monthly snapshots of the consumer retail sector. Any aberrations or sudden drops could mean that consumers are getting skittish about the economy and are refusing to spend money on items not deemed necessary.
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 afternoon, then there may be underlying problems affecting consumer retail.
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 major news on a real-time basis to stay on top of major developments that move markets.
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Traders who believe that the American CPI will be positive might want to consider the following trades:
- Long US equity futures by purchasing shares or call options. If you go with the options strategy, you could purchase a straddle just to reduce risk associated with the bet.
- Short the US Dollar Index against another currency like the Euro. Foreign currencies are likely to move higher against the dollar on positive economic numbers.
- Long the consumer retail sector via an ETF like the SPDR S&P Retail ETF (NYSE: XRT).
Traders who believe that the US CPI will not be positive may consider the following positions:
- Short 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.
- Long the Dollar Index, which is likely to move up if equities go down. US equities move down if macroeconomic information is clearly negative.
- Short the Euro against the dollar, which may be a way to tap into the dollar index's imminent downward movement.
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