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Morning Notes — CPI Scenarios

CPI Scenarios

January 10, 2023

CPI scenarios are in focus as we await the macro event of the week. Options markets are currently priced for a ~2% move in the SPX, with consensus looking for headline CPI of +6.5% YoY and core CPI of +5.7%. The scenario analysis has a short-term bullish skew given positioning dynamics to start the year. We assign a 20% probability for a bearish headline print north of 6.6%. This outcome would reprice terminal rates higher and bond yields would rise across the curve.  The SPX would could fall ~3% under this scenario with cyclical sectors weakest, while defensive groups outperform. We assign a ~60% probability to a bullish headline CPI print in the 6.4%-6.6% range. The SPX has the potential for an initial ~2% rally under this scenario as bond yields and realized volatility make new ~4 month lows. As positive as that sounds, we expect the initial rally to fade throughout the session as attention shifts to Q4 earnings season. A headline CPI print below 6.4% has a 20% probability in our scenario analysis with an associated initial SPX rally in the 3-4% range. Sustaining those gains would likely require a headline print below 6%.   

After Thursday’s CPI report, the market focus will immediately shift to Q4 earnings season and likely further consolidation in the SPX. It will be difficult to sustain any post-CPI gains as the Fed remains active amid a deteriorating economic backdrop. A peak in inflation should stabilize valuation multiples, but may have negative implications for corporate profits that have enjoyed a pricing tailwind since the end of the pandemic. Large cap banks kick off Q4 earnings season this Friday with the potential for larger reserve builds on an increased likelihood of recession. Macro takeaways from conference calls may include lower credit card spending data, higher balances and increased delinquencies.

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