There could scarcely be a more dramatic setup for Thursday’s CPI data in the U.S.
U.S. stocks plunged on Wednesday as equities finally caught up to what it might mean if a flip in the equity-rates correlation proves to be some semblance of sustainable and bonds keep selling off.
The 52-week correlation between the S&P and TLT is now the most positive on record, which suggests that if the bond rout continues, stocks will come under still more pressure.
While it’s not difficult to point fingers when it comes to the cause of the equities rout (it’s the rapidity and stubbornness of rising yields), it’s difficult to pin down the cause of the bond selloff itself. While inflation expectations don’t appear to be gathering much steam, it’s critical to remember that real rates are a function of inflation expectations to the extent the market views the data-dependent Fed as inclined to get more aggressive as evidence of price pressure materializes.
That’s why today’s inflation data is so critical. The August print showed inflation cooling a bit, but it’s possible tariff effects will start to creep in. “Above-target US inflation should support recent increases in US rates, and Fed rhetoric has indicated an ongoing commitment to tightening that remains underpriced by rates markets”, Barclays cautions, adding that if you ask them, core rose 2.3% YoY in September, while headline should print at 2.4%. Goldman and BofAML were at 2.3% on core headed in as well.
More than a few commentators continue to insist that the market is mispricing the chances of a sudden pickup in inflation. The more data-dependent the Fed, the bigger the risk that a “rogue” print (to quote Nomura’s Charlie McElligott) catches everyone wrong-footed. “Going forward, a rogue inflation beat without a doubt is the largest risk-off threat to risk-asset psyche, as it disrupts the current ‘steady’ pace of normalization and would pivot the ‘risk-positive’ narrative from ‘growing faster than we are tightening’ to then risking ‘Fed policy error’ due to ‘over-tightening risk’”, McElligott wrote on Friday.
This took on an extra bit of urgency on Wednesday evening when Donald Trump sharply criticized U.S. monetary policy, calling the Fed “crazy” and “loco” and blaming rate hikes for falling stocks.
So that’s the backdrop against which everyone is essentially praying for a “friendly” number on Thursday.
It looks as though prayers were answered.
Estimates and priors
- US CPI MoM, est. 0.2%, prior 0.2%
- US CPI Ex Food and Energy MoM, est. 0.2%, prior 0.1%
- US CPI YoY, est. 2.4%, prior 2.7%
- US CPI Ex Food and Energy YoY, est. 2.3%, prior 2.2%
- CPI rose 0.1% vs est. 0.2%.
- Forecast range from up 0.1% to up 0.3% from 71 estimates
- Ex. food, energy m/m up 0.116%; est. 0.2%
- Ex. food, energy y/y up 2.17%; est. 2.3%
- CPI Y/y rose 2.3%; est. 2.4%
That’s a miss across the board, and in light of everything said above, that is great news on a day when a hotter-than-expected print might have caused the bottom to fall out for stocks in earnest.
Now let’s see if this is enough to allay fears and bring in the dip buyers.