McElligott, Nomura Hit Home Run With CPI Call

[Editor’s note: By the close Thursday, the Nasdaq 100’s gain was 7.5%]

The dramatic, knee-jerk reaction on Wall Street to a cooler-than-anticipated inflation report on Thursday was indicative of an under-positioned, squeeze-prone setup just waiting for a bullish macro catalyst.

Nomura’s econ team hit it out of the park. And the bank’s Charlie McElligott nailed the reaction.

“Core CPI inflation likely moderated noticeably to 0.3% MoM in October,” the bank said, prior to the release. “While core goods inflation pressures, including vehicle prices, likely continued to ease, an annual update for CPI’s health insurance prices will probably exert additional disinflationary effects, amplifying the expected deceleration in MoM core.”

“It still feels like the largest pain trade would be a big CPI miss today,” McElligott wrote. “God forbid our House view 0.3% prints.”

Well, it did print. And boy, oh boy did equities run. The initial reaction in big-cap tech was profound, to employ a sophisticated-sounding adjective in place of the usual hyperbole. The gains put Thursday on track to be the second-best session for the Nasdaq 100 since 2008 outside of the volatility seen around the original pandemic fireworks (figure below).

Note that the only better session (again, excluding the March 2020 rollercoaster) was the day after Christmas in 2018, when rebalancing flows helped US equities trim what still ended up being the worst December since the Great Depression for stocks.

Needless to say, a less aggressive Fed, a lower terminal rate and lower US yields would be intravenous Zofran for US tech’s acute nausea. It’d open the door to a potentially material re-rating in the sector.

McElligott’s call was astounding. “We are WAAAAAY below Street at 0.3% MoM in Core,” he said, nine minutes prior to the CPI release. “That print would send UST 10-year yields sub-4% in an instant and maybe back towards 3.905, while Spooz probably takes back yesterday, to 3850 and beyond, particularly if the US dollar is clobbered lower again in more capitulatory selling from former longs.”

10s did in fact trade sub-4% “in an instant,” falling ~30bps, while the dollar looked for one of its largest single-session declines in recent memory (figure above).

Recall that the dollar was already on the back foot. Wednesday’s gain for the greenback snapped a three-session slide that counted as a four-sigma selloff. With Thursday’s ~2% drop, the dollar’s five-day decline was nearly 4%. That’s rocket fuel for risk assets.

“CPI today matters because it will dictate market expectations on the FOMC’s rate path ‘step-down’ and ultimately, both the timing — and absolute level — of implied terminal rate projections,” McElligott wrote. A miss, he said, could mean “big bond and equities rallies.”