Morning Notes — CPI Scenarios

Higher Eurozone yields combined with a closed US Treasury market weigh on equity sentiment ahead of resumed trading tomorrow and Thursday’s CPI print, bringing CPI scenarios in focus.

SPX: The Q4 reflex rally scenario remains in tact, but Friday’s break below near-term technical support at ~3675 challenges the rebound that occurred from deep oversold level at key support in the 3500s. Sustained closing levels below ~3500 would likely require a combination of a materially higher September CPI print (this Thursday), disappointing CQ3 earnings and an exogenous shock to oil prices. We’ll cover CPI scenarios below, but a shock to oil prices would likely come from Russia retaliating to price caps by cutting supply. Getting the SPX through near-term resistance at ~3900 would likely require a dovish CPI print, relatively static oil prices and upside earnings reports.

Catalyst: We receive September CPI on Thursday with consensus looking for a headline number of +8.1% vs. +8.3% prior and core CPI to be +6.5% vs. +6.3%.  A headline number north of +8.3% might take the SPX into the mid-3400s. Something in the +8.1%-8.3% range has the potential to generate a ‘buyers strike’ with a negative short-term outcome of -1.5%- 2% with the SPX maintain key support in the 3500-handles. A +7.9% print might get you a +2-3% SPX rally, with 7.8% or lower taking the SPX through ~3900.