Inside Markets — CPI Preview

Consensus is looking for headline CPI of +0.30% MoM and a core rate of +0.30%. This equates to +2.9% YoY for the headline and +3.1% YoY for core CPI.  An inline core CPI print of +3.1% would be the lowest since April ‘21. The SPX will likely welcome an inline number, but anything above +0.33% MoM would have a bearish outcome for equities. In our view, the likely drivers of an upside core CPI print would include higher used/new car prices, acceleration in the car insurance and/or seasonal distortions in the communications category.  An upside core print of +0.33% or higher would likely result in SPX downside of 75bp-150bp.

Markets seem willing to absorb some uncertainty around tariffs as long as US macro data remains strong, the inflation impulse remains muted and until there’s more clarity on Canada and Mexico.  But long periods of increased uncertainty usually command a higher equity risk premia (puts downward pressure on multiples) and an escalating trade war will eventually damage corporate sentiment/tighten financial conditions.  Rising credit spreads are the early warning indicator, and for now IG and HY spreads remain at benign levels.  At a minimum, we expect equities will struggle to make meaningful progress until there’s more clarity on the scope of Canada/Mexico tariffs.