Inside Markets — CPI Preview

Consensus is looking for headline June CPI to rise +0.1% taking the YoY rate to +3.1%, which was last seen in January. The core rate (ex food and energy) is expected to rise +0.2% MoM for an unchanged YoY rate of +3.4% after declining by -20bp in each of the past two months.

Equity and fixed income markets tend to react more to the headline than the core number. An ‘inline print’ in the 0.1%-0.15% range would likely validate market pricing of a September rate cut, which would result in lower yields and higher stock prices given cautious near-term equity sentiment. In our opinion, a headline CPI print above +0.25 may be required to generate downside in the SPX. We don’t foresee a CPI scenario that could generate enough downside to test first line SPX support at ~5375.

We characterize near-term equity sentiment as ‘cautious’ only because official measures like the AAII survey are barely in bullish territory as the SPX continues to make new all-time highs. Cautious near-term equity sentiment will likely keep the pain trade aimed higher assuming relatively unchanged macro/business fundamentals and subdued realized equity volatility.

The CBOE equity volatility index (VIX) has remained at subdued levels (~below 20) for more than nine months. In our opinion, this long period of subdued equity volatility is an underlying source of near-term caution. Subdued volatility always generates multiple expansion and higher realized volatility always generates multiple compression. The VIX will sometimes rise in anticipation of events, but elevated equity volatility (above 20) usually follows a change in macro or business fundamentals. The upcoming Q2 earnings season will be a good test for business fundamentals given expectations for +9% YoY EPS growth. Q2 YoY SPX earnings growth below +5.5% would be a disappointment in our view.