Inside Markets — CPI Scenarios

Let’s review potential CPI scenarios as equity markets will take initial direction from headline CPI, which is due tomorrow.

Consensus is looking for headline CPI to decline to 6.2% YoY in January from 6.5% in December. Equity market volatility remains well below levels from the September CPI disappointment that generated a -3.5% intraday decline in the S&P (SPX) 500. As such, we see a headline print north of 6.5% resulting in an estimated SPX decline of ~2.5%. In this scenario, we’d expect larger declines in expensive software stocks and the NASDAQ 100 (NDX).

Headline CPI in the 6.4%-6.5% range is our forecast with an expected initial decline of ~1% for the SPX and likely outperformance for the Health Care sector. An inline print between 6%-6.3% would likely pull bond yields and the dollar lower, generating as much as ~2% initial upside in the SPX and fading thereafter.  Tech and Consumer Discretionary sectors would be likely beneficiaries as positioning there remains relatively low.

Lastly, headline CPI print below 6.0% would lead to a repricing of Fed rate expectations with low-quality stocks. As a result, we’d expect a ~3% rally in the SPX and a larger move for the NDX. Beyond the initial reaction, it is important to remember that the Fed is more concerned with core inflation where consensus is looking for a decline to 5.5% in January from 5.7% last month.

A Note on Jobs: January’s larger-than-expected payroll gain would have been a big decline had it not been for seasonal adjustment factors.  Weekly jobless claims have remained subdued.  We note last week’s increase in jobless claims and recommend following this measure as we go forward.  Weekly claims above 250,000 are generally associated with a deteriorating jobs market.