The consumer price index (CPI) report has been a key market catalyst for the last year.
Market bulls have been hopeful that peak inflation followed by a steady decline would be the primary factor that drove stocks higher. For the most part, that has been correct. The bullish narrative has been that inflation is not too hot and strong employment would prevent the economy from becoming too cold. It is a Goldilocks economic environment, they believe.
The bears have scoffed at this view of the market. They tell us that the bulls are misreading the Fed, that there is the danger of a rebound in inflation, that earnings are slowing quickly, and the economy is going to stumble.
That is the battle that is taking place, and Tuesday morning at 8.30 am ET we will see if the optimism and celebration about falling inflation continues.
The consensus is that CPI will come in at 6.2% year over year versus 6.5% last month and a 40-year high of 9.1% in June. A 6.2% reading would be a decline of 0.1% from last month.
The market was quite optimistic and celebrated the last few CPI reports. Market players have been willing to ignore just about everything else, including a poor earnings season and a Fed that hints at interest rates that stay higher for longer.
The big question Tuesday is whether this CPI report changes market perceptions. Technically the market is set up for a "sell the news" reaction to an in-line report, but the bears that have been expecting a negative reaction to good news have been squeezed hard. The market has refused to sell off even when the news has been poor. We saw it during earnings season, and we saw it in response to the Fed.
The market saw a slight change in character last week when it finally pulled back, but the bulls were back at work on Monday and didn't seem at all concerned about the upcoming CPI report. It appeared that more bears were squeezed out and that FOMO was still bubbling up.
What is most notable about the market right now is how confident the bears have been even though they are being crushed by positive price action. The market simply refuses to acknowledge all their very compelling arguments. Perhaps it is just a story of too many bears with poor positioning, but we will find out where things stand when the CPI report hits.
My game plan is to trade the reaction to the news rather than try to guess what will happen. I suspect we may see some large swings in both directions Tuesday.
