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Inside Markets — Inflation


July 12, 2023

The US disinflation theme received another boost from this morning’s June CPI print with the headline number coming in at +3% YoY vs. consensus for 3.2% and +4% in May. Core CPI also undershot the street, falling 50bp to +4.8% YoY vs. consensus for 5.1%. This was the slowest pace of headline CPI since March 2021 and the slowest core rate since August 2021. Shelter prices cooled somewhat, but remain a big driver of core CPI inflation despite faster deceleration in higher frequency measures.

The initial equity market reaction to today’s CPI print matches our scenario analysis from yesterday’s note.  The below-consensus outcome of 3% should make an almost certain July Fed rate hike the last of the cycle. Equity markets have reacted very positively to the end of past hiking cycles with outperformance from Financials, Industrials and Materials sectors.  The bond market has also reacted favorably to the end of hiking cycles with a peak in yields occurring 1-2 months before the end.  If the Fed hikes in July, this would make the September 20 meeting the official end of the hiking cycle, which means that bond yields may have already peaked.

The end of a hiking cycle doesn’t mean the Fed is easing, so the move in equities and fixed income markets could initially underwhelm expectations.  The Fed expects core inflation will remain sticky with Q4’23 estimates in the 3-3.5% range.  It’s a difficult balance since too much disinflation can become a headwind for corporate pricing power, which often leads to lower earnings estimates. Lower earnings estimates, reduced corporate capex and increased job cuts are developments that compel a central bank to ease policy.

Technical resistance for the S&P 500 (SPX) sits in the 4515-4565 range.  We expect that level will hold in the near-term.  Tomorrow brings more inflation data, but market attention has already shifted to Q2 earnings season with Friday’s results in focus. A better-than-feared Q2 earnings season is the only near-term catalyst with the requisite density to push the SPX through resistance.  A worse-than-feared earnings season that pressures the index below 4275 would likely derail bullish trend dynamics.

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