Inside Markets — Hot CPI Print

The hot CPI print means that markets will pay close attention to the week’s remaining inflation numbers, including PPI revisions (tomorrow), January import/export prices (Thursday) and January PPI/Michigan inflation expectations (Friday). Today’s growth data doesn’t help risk assets with the January NFIB small business optimism index moving down 2 points to 89.9, its twenty-fifth consecutive month below the 50-year average of 98.

Rising bond yields always put downward pressure on equity multiples. Today’s backup in yields occurs when the SPX trades at an expensive 20.5x forward EPS. The SPX is also technically overbought and due for a pullback. The SPX has been in overbought territory since mid-November, so it will take more than a one-day decline to achieve oversold status.  Also note that this morning’s pullback only returns the index to where it was a week ago. The good news is that Fed rate cut expectations have been bearishly repricing for the last few weeks and the impact of today’s CPI print is somewhat muted.  The idea that January CPI has a seasonal quality may also buffer some of the near-term downside. The SPX needs to break below 4800 (2.8% below current levels) to confirm a short-term trend reversal, but lower levels would be buying opportunities if realized volatility remains contained.

The CBOE Equity Volatility Index (VIX) rises to ~15.5 this morning from ~12.7 last Friday.  Volatility tends to become a headwind for equity rallies only when the VIX rises above 20 and a spike above ~30 usually takes several months to burn off.

Any Fed rate cut will follow a steepening in the yield curve, specifically the 5/10 segment.  Thus far, the 5/10 curve has yet to steepen above first level resistance near +12bp and a break above +19bp should be the green light for a rate cut within 1-2 months.  The shape of the 5/10 curve was headed in the wrong direction two weeks ago and is now nearly flat.

The cyclically-sensitive RTY is the weakest major US benchmark as rising real yields pressure economic activity.  If this continues, it will be the fifth time in two years the index has rejected technical resistance in the 2000-2100 range.  While we don’t expect it, a sustained break above ~2070 would change the technical picture and our skeptical macro outlook.