Re-nomination talk, information theory and DINK CPI

Yesterday I had written about how the constant inflow?of news affects the prices, the most important ones are those which are surprising (unexpected). When viewed from the prism of information theory propagated by Physicist Claude Shannon, surprising news has more information content (or more effort is needed to encapsulate them). For example an event with two possible outcomes can be represented by 0 and 1, with each bit representing one possible state. However an event with four possible states will require an array of 00,01,10,11 to pass on the information, making the process more cumbersome. In markets a well priced event can have three states; inline with expectations or above or below.?However an unexpected news needs to be assimilated at much greater information cost hence it brings more volatility in its wake.

Now one event which has started showing on the horizon is the change of guard at Fed. Term of the Fed chief?is getting over in February next year and the ball is in the US President's court currently to decide who will be the next chief. The betting markets are slowly priming up to the possibility that there is a possibility of "surprise". As of now the bets favor 70% Powell to 30% Lael Brainard who is seen as the challenger. The "news" that Lael Brainard had a meeting with Biden last week has resulted in increasing her odds. Why is this important for the markets is because Brainard is considered of having a more dovish streak as compared to Powell. As the taper is already set in motion, a more dovish change of guard at the helm would nudge the markets to change their positioning on the hikes. The Fed fund futures markets would start showing this thesis in their pricing of hikes. As per President Biden, the decision will be taken quickly. In context of information content, Powell's renomination still is the low information event.

?US CPI data is scheduled to be out today. Coming on the back of fairly elevated PPI data which was released yesterday it is expected that this month will also see a high number. For September CPI witnessed a 5.4% YOY increase. The consensus estimate for this month is 5.8%. But the markets reaction to a surprise print is also going to be muted as the Fed has clarified amply that the current inflation is transitory only. The 10 year US yield is trading around 1.47 levels and dollar index around 94.

On the Indian rupee side the flow story around the IPOs continues to impact the levels. After gaining steady ground for a week now, yesterday saw a dash of weakening. The rise in oil prices was cited as one of the reasons for rupee move. On the data front, CPI will be released in India on 12th for the month of october. In the September CPI print reading was at 4.35% YOY mainly on the back of easing food prices. Apart from food, energy prices also form a sizable portion of CPI basket. There was a recent cut in the excise duty on the energy prices which is expected to seep into prices in coming days. It may not get reflected in the October levels.?

Taking the discussion on inflation forward, one should be aware that the price rise which they experience in their daily life is not the one captured exactly by the headline CPI number. There are multiple CPI calculations which govt puts out (MOSPI is the central agency for the task). There are inflation computed like CPI (IW), CPI (AL), CPI (RL), CPI (UNME) (IW is industrial worker, AL is agriculture labourer etc). The computations change as per the consumption baskets for different groups. Your personal consumption basket may not align to any of the above. CPI (urban) series might also not reflect the reality of all the urban dwellers. Maybe one day the govt might decide to publish CPI (DINK) and CPI (NINJA) which might better capture the reality of urban households. (DINK and NINJA are the terms borrowed from the US mortgage market, DINK represents Double income no kid families and NINJA refers to No income no job families ).

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