Morning Notes — CPI/SPX Outlook
November 7, 2022
CPI/SPX Outlook is generally favorable following aggressive Fed comments last week.
Fed: The post-FOMC speakers tour picks up this week with aggregate comments likely to sound less hawkish than Powell’s press conference last Wednesday. Late Friday, Chicago Fed President Evans said the cycle ceiling is now only ‘slightly higher’ than levels implied by the September dot plot with a potential to downshift to 50bp or even 25bp hikes going forward.
SPX: Our expected Q4 rally remains intact as long as the S&P 500 (SPX) remains north of technical support at ~3650. Near-term SPX direction is being dictated by terminal rate expectations that we extract from the OIS forward market. The SPX has backed off, but remains fairly resilient despite higher terminal rates coming out of Wednesday’s Powell press conference and the recent breakdown in mega-cap Tech stocks. The mid-October technical signals that had us positioned for a Q4 rally remain firmly in place and lower terminal rate expectations coming out of Thursday’s CPI print are now required. If realized, our CPI forecast (below) should be enough to keep the Q4 rally scenario in place with other drivers including the passing of midterm elections, favorable positioning, favorable seasonality and the potential for incremental China reopening. Higher terminal rates post-CPI and a break below ~3650 would likely end our Q4 rally narrative, but there’s strong technical support just underneath in the 3500-3525 area.
CPI: We expect October headline CPI will come in up +0.6% MoM, leading to a YoY moderation to 7.9% from 8.2% last month. Most of the strength in October headline inflation comes from energy prices following three straight monthly declines. We expect softer readings in other CPI components including new vehicle prices, used vehicle prices, Apparel prices, communication prices and medical care inflation. We’re looking for core CPI (ex food and fuel) to be up +0.4% MoM and +6.4% YoY vs. September’s +6.6%. We expect most of the gain in core CPI will come from rent measures again with expectations for substantive declines during Q1.