Inside Markets — CPI Preview

Consensus is looking for headline CPI to rise +0.4% MoM and +3.4% YoY with core CPI expected to rise +0.3% and +3.62%. The market has fixed the price index higher over the last few sessions that aligns with an unrounded +0.33% MoM gain. The more hawkish recent pricing skews risk/reward to the upside with any sequential decline in the MoM core rate from +0.4% in March generating upside.  On an unrounded basis, we see core CPI coming in at +0.28%, which would correspond to a +3.61% YoY rate.

An unchanged core rate of +0.4% would generate some downside in the SPX with unprofitable growth stocks hardest hit. Unprofitable growth stocks have become more sensitive to inflation, interest rates and bond yields because higher borrowing costs make it more difficult to turn profitable. Stocks with the longest expected path to profitability would experience the greatest downside from a hotter-than-expected print.  Longer-term, high levels of fiscal spending have created an unfavorable supply/demand dynamic in the bond market, which should keep 10-year yields higher for longer.  A core CPI print that matches our expectation would likely provide a brief relief rally for unprofitable growth that we’d fade longer-term.  We see the 10-year yield staying near 4.5% over the next month with a target of ~4.15% by the end of Q2.  Unfortunately, the increased Treasury issuance we expect will likely keep the 10-year from falling below 4% through YE ’25.

The Fed uses the YoY rate of core PCE as its primary measure of inflation.  YoY core PCE has a better chance of declining over the next two months than it has in H2 due to base effects.  There are good reasons to expect a sequentially lower pace of core PCE inflation in H2, but the YoY rate will likely remain in the 2.6%-2.7% range.  That kind of outcome could result in one or two Fed rate cuts this year, but that’s about it