August 9, 2023
Equity markets fully embraced the disinflation theme following a cooler June CPI print, but investors now seem a bit hesitant going into tomorrow’s July CPI report. CPI base effects that were a tailwind for the last year, turn into a headwind beginning with tomorrow’s print. July headline CPI is expected to accelerate for the first time in more than a year with consensus modeling +3.3% YoY vs. +3% in June. Commodity prices are another concern given a ~16% rally in crude oil and upside pressure on agricultural commodities during the month.
The Fed will likely focus on the MoM CPI numbers knowing that base effects skew the YoY numbers higher for the time being. Consensus is looking for both headline and core CPI to rise 0.2% MoM in July. For our purposes, we’ll focus on the headline number. A headline CPI print north of +0.4% MoM is the downside tail risk scenario generating likely downside in the SPX of -1.5% to -2%. We assigned a 25% probability to something in the +0.2%-0.4% range. That kind of outcome would likely result in a -1% to -1.5% decline in the SPX. A consensus print of +0.2% has a 40% probability with the SPX ticking up +0.25% to +0.50% as a result. A headline CPI report between +0.1% and +0.2% gets a 25% probability and would likely result in the SPX adding +1% to +1.5%. A print below +0.1% is the upside tail risk with the SPX picking up +1.5% to 2% as a result.
We see increased likelihood of a dovish print tomorrow, but don’t expect this report to be as meaningful to Fed policy as the August CPI that hits prior to the September 20 FOMC meeting. Excluding an exogenous shock, we expect more disinflation over the next two months given the deflationary impulse in China core goods prices. We don’t expect the Fed will announce an end to the hiking cycle at the August 24-26 Jackson Hole summit, preferring to retain its optionality until September 20. A nothing done at Jackson Hole should result in enough policy ambiguity to generate a little more downside for equity markets. An announced end of the hiking cycle should result in bullish yield curve steepening, which is usually bullish for equities as well. And the SPX keeps its intermediate-term bullish momentum as long as it holds above ~4325.