August CPI is released Wednesday morning at 8:30am ET. Reviewing Wall Street consensus (see below), it seems like the Street is ready for a "hot" CPI print, above the Core MoM consensus of +0.20%. In fact, the closely watched Goldman Sachs estimate is +0.24% Core.
* On the surface, this feels like a possible disappointment, because this breaks the string of 2 consecutive months of Core CPI MoM of +0.16% or lower. A +0.24% MoM is still impressive because it is 2.88% annualized, but we all know that markets care about "on the margin" and this, on the margin, is a miss.
* Our data science team, led by "tireless Ken," looked at the last 10 CPI prints and subsequent equity market reaction:
-- 6 saw Core CPI MoM "hotter" than consensus (above) +0.01% to +0.10%
-- 4 of 6 times, equities gained in the following week
-- 5 of 6 times, equities gained on the day of CPI
* So, perhaps this is not entirely bad news, even if it feels like a miss. Why? I think it depends on the details. In our view, the monthly CPI reports are subject to noise and variability and the source of higher CPI is often idiosyncratic. The key, in our view, is that shelter and vehicles represent 57% of Core CPI and 71% of the rise in Core CPI.
-- used cars are set to fall 10% and perhaps as much as 29% over next few years
-- shelter CPI is lagging real-time measures
* So our take is that Core CPI is set to soften. In fact, there remain more "green shoots" of disinflation. Bloomberg had an article Tuesday (link-> here) highlighting that Adobe (ADBE) -4.00% tracking shows online good prices fell -3.2% in August, a sign of outright deflation. And this is the largest decline in 3.5 years and one has to go to depths of pandemic crash to see such declines.
* Moreover, Fed funds futures have calmed down a bit and the odds of a November hike are back down to 35% from >48% a few weeks ago. It could jump today (9/13) though.
* Equity markets are most closely watching yields and it will be important for US 10-yr yields to soften from the current 4.28%, although Mark Newton has warned this could surge to >4.35% near-term. That would pressure stocks.
* This ultimately shows how stocks have again become a "game of inches" and September is shaping up to be tough.
Bottom line: We worry of a "hot" CPI but we think stocks are likely power through that.
We still have the view that weakness in September is front loaded. But equities sure feel pretty nervous. I guess we should expect some relief today, even if CPI is not great. That said, this is a stark reminder that we are in a period of transition in consensus thinking:
* Many are convinced the US is heading for a hard landing vs our "soft" view. There is no decisive break year.
* Many are convinced that inflation is sticky and will surge again as the US economy picks up momentum. A "hot" CPI will bolster this argument, but our view is inflation is set to track lower.
* Sentiment is cautious and the latest BofA Fund Manager Survey (FMS) shows Bonds, Healthcare and Utilities are the Overweights.
We would like to see a "soft" Core CPI of +0.16% to +0.18% but consensus seems to be shifting towards a higher number.
Source: X.com
Source: Bloomberg
Source: X.com
