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Market Insights

What's the lowdown with CPI?

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Today, we have potentially the most important data point of the year: The US inflation release.

OK, pretty much every data release concerning inflation, interest rates and unemployment have been the most important data point of the year over the past 12 months, but this one really could be!

You may ask why.

Well for us, we’re looking at the old terminal rate again in context of Jerome Powell’s recent speech and the employment data released just after it.

We have outlined some of this well needed context in this article from last week.

The below chart from Goldman Sachs shows the terminal rate expectations, which are expected to be at 5-5.25% on their own forecast vs the market’s pricing of 4.99% for May 2023.

image

But be prepared. The terminal rate may rise…

If today’s release comes in STRONGER than expected, bets on the Federal Reserve might remain higher for longer are likely to strengthen - especially considering the recent big beat on non-farm payrolls (263,000 added vs expectations of just 200,000).

The current forecast for US CPI is at 6.2% for the core YoY figure, with the same MoM figure reaching expectations of 0.4%.

From this then, we can perhaps make a deduction that stocks are likely to be affected negatively from a ‘higher for longer’ interest rate environment.

The NASDAQ is most susceptible to a rise in interest rates due to the quantity of higher beta stocks that comprise the index.

Higher beta in simple terms, means they’re more volatile than the market overall - in low interest rate environments, they might rally more than the index, while in higher rate environments, they might face more downside.

This is largely why understanding the context of data and each data point’s relationship with interest rates is so important (and why we’re telling you about it!).

In the first article we linked above, we mentioned the market is likely looking further ahead past near term inflation (as expressed by bond yield spreads) and is making a case for slower growth a little further out in time.

Higher inflation will naturally put downward pressure on real GDP, but it’s likely also that now we start seeing the inflation of the past year really affect nominal GDP too.

People’s savings are now eaten up, and it is only the richer demographics that do not necessarily have to cut back so much - this means instead of using up savings for purchases, those with the highest marginal propensity to consume (middle earners and below), are going to be forced to balance their budget via lesser consumption.

This is where nominal GDP growth is affected, and is certainly a conundrum for the Fed!

Caution should be used tomorrow…

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To the upside, we have noted some levels where there are likely to be stop loss clusters from previous sellers.

On big volatile news events, these love to get hit on the initial moves, causing the market to become exuberant one way as it rallies or crashes through them, just to go the other way soon after.

If we get a stronger number, take note of what was mentioned above (with regards to how stocks move with higher or lower interest rate expectations).

Good luck!

Not investment advice. Past performance does not guarantee or predict future performance.

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