Tactical Trader **CPI Cheat Sheet**
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Good Morning all,
Today, it's all about the US inflation data. The CPI, which is released an hour before the market opens, sometimes makes for an explosive trading session. So with that in mind, let's take a look at how the S&P is situated, and discuss the market's expectations for the data.
S&P Daily Chart
Yesterday's pre-CPI pump has taken the price clear of the 4300 Gamma magnet, the August highs, and to a new 52-week high.
As we keep stressing, indices are looking very stretched in the near term. And while the Relative Strength Index of 69.6 is not quite "overbought," the price is above the top Bollinger band. In other words, there's a lot riding on today's inflation print to get the market even higher.
Here's the deal: The longer we stay above 4300, the bulls will grow even more confident (and complacent). And a softer CPI print today will only strengthen their resolve. On the flip side, if the CPI comes in hotter than expected, we'll find out just how complacent the market is.
Here's what the market expects...
Inflation rate +4.1% year-over-year, down from last month on softer commodity prices, and +0.42% month-over-month.
As is usual for CPI day, the big brains over at JP Morgan have released their mandatory "finger in the air" predictions on how the market will react to today's data.
Headline YoY prints 4.9% or higher. This tail risk scenario would likely drive rate hike expectations higher and potentially leave us with an unofficial news report that the Fed will hike the next day while keeping July in play for another 25bps hike. It is possible that under this scenario we see the market price in a 50bps hike, too.
Odds: 2.5%; market reaction: SPX loses 2.5% - 3%.Between 4.5% - 4.8%. This type of hawkish print will do little to dissuade markets from pricing further Fed action especially if we see Core and Core Services accelerate higher.
Odds 15%; market reaction: SPX loses 1% - 1.5%.Between 4.2% - 4.4%. This scenario confirms the disinflationary trend but at the upper end of the range it would do little to aid the “Fed is done” narrative. The key would be the reaction in the bond market as yields moving higher on the back of this print would provide a near-term headwind for stocks. Odds 35%; market reaction: SPX is flat to up 0.5%.
Between 4.0% - 4.2%. Our most likely scenario and one that will have the market inching closer to “Mission Accomplished” on breaking inflation. This should also cement the Fed being paused in June with the print more integral to the July Fed meeting.
Odds 40%; Market reaction: SPX adds 0.75% - 1.25%.3.9% or lower. Another unlikely scenario that could see the bond market remove all hiking expectations aiding stocks, specifically the Tech trade. With another significant step down expected in July, you could see the narrative around rate cuts shift from one relating to recession/bank contagion to one of the Fed moving from less restrictive territory given the progress on inflation.
Odds 7.5%; Market reaction: SPX adds 1.5% - 2%.
But the options market is hardly bracing for volatility, with the 1-day straddle implying a measly 0.76% move. To put that in perspective, the S&P was +0.93% yesterday...so work that one out!
As the below table from Goldman demonstrates is the lowest 1-day expected move on CPI day since 2021.
Note how the last time the market moved more than expected was back in November 2022, when the S&P ended the day +207 points.
So who to believe JPM or literally everyone else in the market? Hard to say, but the options market has failed miserably when predicting big reactions on CPI day. I wonder if this time around the collective wisdom is way off the mark in expecting a small move.
Thanks for reading and good luck out there.
Elliott.
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