Why the CPI Report Matters and Could be a Bullish Catalyst
As long as inflationary expectations remained low after Jerome's last speech where he spoke about softening the increase in interest rates, which may or may not be the case, there is a good chance that inflation ticks down. This would confirm a 50bp hike for December, easing monetary policy and providing room for equities to continue their rally. While I think a lower CPI report is more likely in the near-term than a tick up in inflation, with a possible higher than 50bp increase and a decline in equites, it could go either way.
Later, when the lagging effects of QT are felt, I expect a further decline in the market as discussed in my previous thesis.
It is also possible that inflation stays near its current 7.7%, in which case there may not be too large of a response in equity markets tomorrow. The bigger the move in CPI, the bigger the move in equites. VIX is inching up in anticipation of this binary event.
I am linking this thesis with "long" because I believe the negative CPI trend will continue and result in a near-term rally, but this is only because I feel there is a higher probability of this occurring, not that it is by any means certain.
InTheMoney
Later, when the lagging effects of QT are felt, I expect a further decline in the market as discussed in my previous thesis.
It is also possible that inflation stays near its current 7.7%, in which case there may not be too large of a response in equity markets tomorrow. The bigger the move in CPI, the bigger the move in equites. VIX is inching up in anticipation of this binary event.
I am linking this thesis with "long" because I believe the negative CPI trend will continue and result in a near-term rally, but this is only because I feel there is a higher probability of this occurring, not that it is by any means certain.
InTheMoney
Comment:
I would like to add that any significant increase in inflation will open up a large downside move because 50bps is pretty much priced in. A good drop in inflation means that future monetary policy restrictions will be less, or even stop sooner than expected, which will result in a rally. A small decrease in inflation may not see a lot of movement as it will remain in-line with the FOMC's 50bp cut and future interest rate trajectory.
