Well, it’s Tuesday and everyone is frozen in time ahead of tomorrow’s CPI print.
That number would have been closely-watched even without the events of the last two weeks, but after learning just how acute the situation can get when someone screams “INFLATION!” in crowded theatre, market participants are now looking at tomorrow’s data as something of a make or break moment.
And they may be right, at least in terms of the short-term outlook for bond yields. If CPI misses to the downside, it could arrest the bond rout for the time being and while you’d be inclined to think that would be good for stocks in light of recent events, Bloomberg’s Mark Cudmore reminds you that “it could be argued that that event is skewed to be an equity negative either way.”
“If there’s high inflation, then yields might rise again, further squeezing liquidity and financial conditions,” Mark writes on Tuesday morning. “A low print — and it would appear markets have got way too far ahead of themselves in pricing rising inflation — and more wealth destruction will come through a squeeze of the large short positions in Treasuries.”
Still, over the long-term, it’s becoming increasingly difficult to argue that that yields won’t rise further. The fiscal backdrop supports that thesis as does the data, even as signs of upward pressure on prices are still nascent. And then there’s everything outlined here over the weekend.
“As QE gets tapered through this year and into next year, we’ve got a big swing in the supply duration coming,” Goldman Asset Management’s Philip Moffitt said in an interview today, adding that “I would think that 3.5 percent is not a very brave forecast.”
Anyway, what we do know is that “we’re not in Kansas anymore” when it comes to the daily swings.
The above-mentioned Mark Cudmore talks a bit about that on Tuesday morning as well, noting that to a market which has become accustomed to minimal moves in either direction, this looks like some crazy shit. “February has already seen the S&P 500 carve out a range of more than 10% and we’re still less than two weeks in,” he writes, adding that “bulls shouldn’t relax until E-mini futures break above last week’s open at 2,757 while bears must be nervous about the possibility that 2529 will be seen as an important double-bottom in hindsight.”
Who knows, right?
One thing SocGen’s Andrew Lapthorne knows is that “the fundamentals” are usually some semblance of “good” when shit starts to hit the fan so maybe don’t lean on that.
“When markets correct, the standard retort is that in the long-term it pays to stay invested and that the fundamentals remain strong and supportive, so we had a look at prior corrections in the S&P 500 to see how fundamentals looked at the point when the market turned,” Lapthorne writes, in a new note. “Using data since 1985 (as we wanted to include consensus growth expectations) at the point when the S&P 500 dropped 10% or more, on average the US ISM index was at 51.6 (indicating economic expansion), trailing EPS growth was on average running at 7% and forward growth expectations were at 11%.”
What’s the point, Andrew? Well, “the point being that at the top, economic fundamentals always look strong and this is why interest rates are going up,” he adds.
So it’s the rates. Which is why all that matters is tomorrow’s CPI print.