Morning Notes — CPI and Q4 Earnings
CPI and Q4 Earnings
January 11, 2023
Quiet overnight headlines ahead of tomorrow’s CPI report and Friday’s start of calendar Q4 earnings season. Trends this morning are likely the result of position squaring ahead of these events. There’s more upside for stocks with the highest short interest. Hedge fund positioning flows from last week suggest short selling was more than two standard deviations above the 4-week average. Positioning is considered a contrarian indicator at extremes with last week’s numbers approaching levels that preceded three separate short-covering events in 2022. Our CPI scenario analysis from yesterday skews to short-term upside based on positioning dynamics. However, most of our bullish CPI outcomes are expected to fade throughout the session as market attention turns to Q4 earnings results on Friday. Consensus is looking for headline CPI of +6.5% YoY and we only expect sustainable gains from outcomes at or below 6%. We expect immediate SPX downside from headline prints above +6.6% with higher bond yields and higher terminal rates leading to resumed downside equity momentum.
Next: Pricing has been a tailwind for S&P 500 earnings since the end of the pandemic and any disinflationary cycle will produce near-term sell-side estimate cuts. Moving past peak inflation will help stabilize valuation multiples, but the net impact of lower earnings estimates could weigh on equities during the next few months. We look for the S&P 500 to successfully retest last year’s low near 3550 with lower bond yields and curve steepening bolstering conviction in a cyclical recovery from those levels. The 5/10 yield curve inversion peaked about four months ago with the negative spread now close to single digits. We expect an eventual move into positive territory to signal an imminent Fed pivot and closely correspond with a bottom in the SPX.