CPI and SPX
June 12, 2023
CPI scenarios: Consensus is looking for YoY headline CPI to drop to +4.1% from 4.9% last month and the core rate falling to +5.3% from 5.5%. A headline CPI print of +4.9% or higher is a bearish tail risk scenario given recent sharp declines in food and energy prices. A print like this would take rate expectations up by ~50bp and cause a ~2.5% decline in the SPX. We assign a 15% probability to a headline number in the 4.5-4.8% range with a corresponding ~1% decline in the SPX. We see a 35% probability for something in the 4.2-4.4% range, which would keep the Fed policy debate alive and result in little change in the SPX. Something in the 4-4.2% range is the highest probability scenario at ~40%. A print like this should keep the Fed on hold in June and move the focus to the June CPI report in July. We see the SPX adding ~1% under this scenario. A headline CPI number at or below +3.9% is the bullish tail risk, which could result in SPX upside of 1.5-2%. Under this scenario, the market would likely price out any chance of future rate hikes, which would benefit Tech more than any other sector. We’re looking for a +4.2% YoY May headline CPI number, falling to +3.3% next month.
SPX: The S&P 500 (SPX) managed to extend into bull market territory after a late-May increase in the US Economic Surprise Index (ESI) forced portfolio managers to close cyclical sector underweights. The rebound in the ESI and the associated cyclical sector rally removed an important bearish talking point about narrow market breadth and thin leadership. In our opinion, bullish cyclical sector participation is the key to maintaining a positive outlook. The healthiest bull markets are often led by deep cyclical sectors like Materials, Industrials and Financials. Today’s Net Interest Income (NII) warnings from KEY and CFG are taking shares lower this morning. Lower bank NII shouldn’t be a surprise for anyone, and an ability to shrug off these headlines in the days ahead would be a bullish development for the broader tape.
Contrarian: Sentiment is no longer a bullish supporting factor after last week’s big uptick in the AAII bull-bear spread to +20.2. This is the highest bullish reading since 11/11/21, which preceded a -23% decline in the SPX by 6 weeks.