Traders Lose Confidence in CPI Data Security Due to Volume Shock

(Bloomberg) — Traders from New York to Chicago to London will be chained to their screens Thursday morning for the latest CPI data from the Labor Department, due at 8:30 am in Washington.

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In fact, many will be watching the trades closely even before the numbers come out because of what happened last month.

On December 13, the monthly CPI, one of the Federal Reserve’s preferred measures of inflation, was scheduled to be released at 8:30 a.m. sharp, as usual. But 60 seconds before, something strange happened. Trading volume in 10-year Treasury bond futures has soared up to three times the level seen a minute before any of the last 24 CPI reports, Bloomberg Economics analysis showed.

“The trading volume was pretty unusual,” said J. Christopher Giancarlo, head of the Commodity Futures Trading Commission during the early years of the Trump administration and now senior counsel at the law firm Willkie Farr & Gallagher.

The Department of Labor dismissed the possibility of a data breach after a preliminary investigation. There are no signs that regulators such as the Commodity Futures Trading Commission or the Securities and Exchange Commission are looking into the matter.

A CFTC spokesman said the agency monitors market movements on a daily basis, answering a question about how it plans to monitor the Treasury futures market ahead of the next release of the consumer price index. The SEC did not respond to a request for comment.

However, no one has been able to explain what happened, and speculation remains that the surge in trading was caused by a hack or leak.

“I think this shows how important it is to have a publishing process that is trusted by market participants, especially in times of economic uncertainty when the latest statistics are critical,” said Graham Harper, head of public policy and governance. market structure at Chicago-based DRW, one of the largest trading firms in the world. “The current mechanism for publishing economic data raises doubts about the integrity of the process.”

No chance

The report has caused the market to fluctuate wildly in recent months as the population has been gripped by a spike in inflation. A study last year by Barclays Plc strategists including Anshul Gupta and Stefano Pascal found that over the past decade, stocks have never reacted as negatively to economic indicators as they do to the CPI.

This next set of numbers is even more important, as it will be a key factor in determining whether Fed officials will raise interest rates by half a percentage point for the second straight meeting, or cut to a quarter of a point. Economists’ average CPI forecasts suggest a 0.1% decline and a 0.3% rise in the so-called core CPI, which excludes food and energy.

Option traders are pricing the S&P 500 up 2% in either direction on Thursday. Data compiled by Bloomberg shows that although this is a lot, the figure is still below the realized move of 3% after the previous five inflation reports.

From a regulatory standpoint, the situation presents a good opportunity for government officials to conduct an internal investigation to restore confidence in financial markets by looking at the way CPI data are published in general, with the opportunity to reassure markets that the playing field is level. Giancarlo said.

Meanwhile, Joseph Saluzzi of Themis Trading LLC is taking no chances. He said that this time he should be especially careful, and he will carefully study the trade a few minutes before the report than before the previous data.

“People will be more vigilant now, this minute ahead of the CPI, even as the official sector says, ‘It’s okay, nothing really happened,’ said Chris Ahrens, strategist at Stifel Nicolaus & Co. Following the wage figures, the responsibility now lies with the inflation figures to kind of set the table for whether the Fed goes 25 or 50 basis points at its next meeting.”

–With the assistance of Reed Pickert and Chris Middleton.

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