Good morning contrarians! This briefing (though not the podcast) has been updated with the CPI number. Scroll down to the boldface font.
Stock futures are doing very little a day after selling off. Tech saw the worst of it yesterday, with the Nasdaq giving up more than 2%. S&P 500 and Dow Industrials both fell more than 1%.
Consumer Price Inflation
The U.S. Bureau of Labor Statistics reports its Consumer Price Index reading for March at 0830. Economists expect consumer prices to have increased by 8.4% year-over-year, more than the 7.9% seen the previous month. Stripping out food and energy prices, the core CPI is expected to have increased 6.6% versus 6.4% last month.
This is a pretty big report and at least one analyst, podcast guest Barry Knapp, expects the Fed to raise rates by 0.5% if the reading comes in hot. The core reading will be the one to watch as food and energy prices are more cyclical.
Update: Core CPI came in at 6.5% YoY even as the headline number increased by 8.5%. Consider this a bullet dodged where 50bps rate hikes are concerned, at least for now. Indeed stock prices are moving higher after this report.
It’s worth pointing out that for all their flaws, economists are usually pretty good with this estimate. It’s the rare month that the core CPI misses the survey number by more than 0.1 or 0.2 percentage points. Since the start of 2020, there have been just five times (out of 26 reports) where the core CPI missed by 0.4 ppt or more: last month (when the survey number was 5.9% and the print came in at 6.4%), May, June and July 2021, and July 2020. Pre-Covid it basically never happened.
It’s also worth mentioning that during each of these periods, the economy (and prices) were dealing with exogenous shocks: The Russian invasion last month, fiscal Covid stimulus last summer, and, well I guess July 2020 was an outlier. Still, that’s a pretty good record.
Of course, Russia-Ukraine may still be causing havoc with economists’ forecasting machines. And the Fed may not care what the reasons are, based on the noise Fed officials have been making these last couple of weeks.
The Bottom Line
Expect there to be a major sell-off if the inflation reading does come in hot. Again, the core CPI figure is the one to watch. There will be a lot of headlines blaring today about inflation at its highest level since 1981. That is irrelevant where markets are concerned. All that matters to investors are the survey numbers and if those are breached — and if so, by how much.
Fed officials appear to have the market convinced they are going to hike by 50 basis points if this metric exceeds forecasts. That could cut stifle growth, especially in the real estate market (which by all accounts is already starting to slow already). But the Fed has signaled this is a risk it is willing to take to ward off inflation. The question now whether this talk is to be taken seriously is irrelevant at this point — what matters is investors are treating it as serious and markets are moving accordingly. Just look at bonds.
And if the reading comes in soft? Then maybe there will be a relief rally. But risks appear pointed to the downside at this point.
Be sure to read the latest weekly podcast, which is so far only available to you premium subscribers. The guest, Leo Schmidt of River Eddy Capital, has some interesting insights where the fallout of this inflationary environment is concerned — and some ideas with stock investments to take advantage.
The Mother of All Inflation Readings: Daily Contrarian, April 12