How Will CPI Data Affect the Market?

The time has arrived once again to strap up and get ready for a volatile day. There are speculations in favor of both bulls and bears regarding the CPI data for October 13, 2022. What can we really expect from inflation? Let's talk about it for a moment.

Trading Wing Theory

We are currently leaning on the bullish side (60/40 or maybe even 70/30) for several reasons that I will break down today.

On October 12th (today), we were provided with several key takeaways from FOMC Minutes. I will begin by listing the positive points made, and then share what I would say was negative. Please note, these are in relation to stock investors and not generally!

The Positives of FOMC Minutes:

  • U.S. financial conditions tightened over the period, largely reflecting an upward revision in investor's outlook for the path of policy rate.

  • Liquidity conditions remained low (compare this to the United Kingdom where liquidity was non-existent and led to more printing in order for the Fed to buy out government debt = greater inflation. Here we do not have that - low liquidity is still not the best but it's a positive in my books).

  • Fed funds rate shifted higher - indicating a more restrictive path of policy than initially expected.

  • Treasury yields climbed substantially, with most of the upward move reflected in real yields.

  • Yields in most advanced foreign economies rose sharply (tightening is working!)

  • Treasuries continue to function in an ordinary manner (if treasuries are affected, market will only see greater bearish volatility).

  • Expectations of future credit quality for businesses deteriorated. This may sound bad but this is commonly present in a recession prior to a recovery.

The Negatives of FOMC Minutes:

  • Job gains had been robust in recent months and inflation remained elevated - leading to continued and broad price pressures (more jobs = more money required = more demand = more printing = more inflation).

  • Continued war creating additional upward pressure on inflation. But...this affects the global economic activity, which, depending on what this means, can be a positive. If activity is decreased, then demand will also decrease - thus, loosening the tight grip on supply and demand.

  • U.S. real GDP increasing at a modest pace while labor demand remains strong.

  • Price index for personal consumption expenditures (PCE) remained elevated.

  • PCE inflation is predicted to be 5.4 percent by end of year - though current numbers make this difficult.

  • Private-sector job openings moved slightly lower (good) while still remaining quite high (bad). We need more unemployment and less job openings in order to favor the market.

There are several other points to make but I wanted to keep this brief and simple to read. I do not think the negatives are anything new that we haven't heard already. The positive remarks are really the key takeaways here - a breath of fresh air.

Where is the S&P500 going?

Here is my thought for tomorrow's market reaction. If CPI is at or below 8.0 percent, we will likely see a rally of 4.3-4.9 percent in the bullish direction - bringing the S&P500 (SPY) to roughly 373-375. If the CPI remains at or above 8.3 percent, we will likely see a pull on SPY to 347-349 - another 52-week low.

Yes, a 4 percent move is quite large, but as I mentioned on my last report, there is also an area of high confluence in the morning, which typically add volatility and volume to the market.

Are you a bull or a bear? Why?

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