Inside Markets — CPI Print

Option pricing implies a 1.3% (+/-) move following tomorrow’s CPI print.  Consensus is looking for a +0.3% MoM increase in headline and core CPI.  In our opinion, a headline number >0.40% would likely result in 2-2.5% downside in the SPX to the top end of technical support in the 4980-5060 range.  This scenario would also likely result in 10-year yields lifting into key resistance levels in the 4.45-4.51% range and the most logical place to add bond duration.  A headline number <0.10% would be the best case scenario and likely result in 10-year bond yields falling below 4.20% with the SPX adding 1.5-2%.  The upside tail risk scenario would still keep the SPX below trend resistance at 5323 and below the October ’22-October ’23 implied percentage price objective of 5415.

Bottom-up consensus SPX estimates for Q1’24 imply 3% YoY EPS growth.  This is the same estimate we saw at the start of the Q4’23 earnings season that ended up printing +8%.  The current 3% YoY Q1 EPS growth estimate seems like a low bar when you consider the recent string of improved macro data.

 The cyclically-sensitive Russell 2000 (RTY) remains below range resistance at ~2100.  The most recent attempt at an upside breakout occurred last week. While we’ve been skeptical about the prospects for a breakout, the current pullback looks like healthy consolidation following a decent rally.  However unlikely, it’s important to recognize that a sustained break above ~2100 could signal the start of a potentially violent catch up trade in small-cap stocks.