November 9, 2022
Catalyst Ahead: Markets understand the major lags in many CPI components, so a hotter-than-expected print tomorrow may have less impact on equities than it did 6 months ago. Nonetheless, we expect tomorrow’s number will move terminal rate expectations, equities and shape expectations for the Fed’s December rate hike specifically. The OIS market is fully priced for a 50bp hike on 12/14 with a 45% probability for a 75bp hike. Consensus expectations are looking for YoY headline CPI of +8% (down from 8.2% in September) and a core rate of +6.4% (down from 6.6%). We assign 40% probability for an inline print of 7.9%-8% with a favorable expected SPX reaction worth as much as +2%. We see a 30% probability for a hotter-than-expected headline number in the +8.1%-8.3% range generating SPX downside of ~2%. A cooler than expected print of 7.7%-7.9% seems like a 20% probability with expected SPX upside of as much as +3%. We see a 5% probability for headline CPI to come in at or above 8.4% with the SPX likely trading off as much as -6%. We also assign 5% probability for headline CPI to print at or below 7.6%, which could generate a SPX rally of +6%.
Tactician: The S&P 500 lost upside momentum at technical resistance near 3900 after Powell’s more hawkish press conference. A subsequent break below ~3800 had us looking at support near 3650 into tomorrow’s CPI print. A push below ~3650 shouldn’t spell disaster with strong secondary support in the 3500-3525 area with the original bullish signals that had us expecting a Q4 rally still intact. Terminal rate expectations are still the dominant cross market driver of equity market direction, but the SPX has become much more sensitive to amount of implied easing in the OIS forward curve. The OIS forward curve shows a June’23 peak of 5.08% with the Fed funds rate expected to decline by only 86bp to 4.22% over the next two years. A two year rate closer to 3.70% would likely take the SPX above strong technical resistance near 4,150.