Inside Markets — CPI Scenarios

Wednesday’s CPI report is the most important near-term catalyst, with consensus is looking for headline MoM CPI to come in at +0.3%, which would put the YoY rate at +3.4%, up from +3.2% in February. The street is also looking for a core rate of +0.3% that takes the YoY rate to +3.7%, down from +3.8% last month.

Potential CPI scenarios include the following: 1) an inline print should keep YTD trends in place with equities grinding slowly higher led by large cap stocks with a subtle cyclical/value bias; 2) a hotter-than-expected CPI report would likely result in something that looks like last August-October when crude prices drove bond yields higher and pressured equities lower.  However, recently robust growth data would likely keep recession fears at bay and limit the downside for equities. In SPX terms, we estimate the downside to be something like ~5060 or ~2.8% below current levels. This scenario would also encourage further rotation into Energy and Materials sectors, with the momentum factor acting as a source of funds and underperforming the broad market; 3) a cooler-than-expected CPI print could push the SPX to the upper end of our bullish price objective near 5330 or ~2.3% above current levels.  Rate-sensitive YTD laggards would likely outperform with credit, regional banks, renewable energy, Utilities and REITS as key beneficiaries. Depending on magnitude, a cooler CPI print could encourage bullish yield curve steepening, which would pull small cap and cyclical/value stocks higher as well.

The focus has been on core CPI and core PCE for several months, but the recent rise in commodity prices adds upside risk to headline and core rates.  The hope is the long-awaited shelter disinflation kicks in for the March print and potentially offsets recent commodity price pressures.  Upside inflation risk also comes from ongoing tight US labor markets and what looks like economic green shoots (improved PMIs) emerging in Asia and Europe.