Market Anticipates CPI Release: Impact on Rates and Stocks
In anticipation of tomorrow's market movements, attention has shifted from the recent April payrolls report, which was weaker than expected, to the upcoming CPI release. The market has been buoyed by the idea that negative economic news is actually positive for stocks, in contrast to the previous month when strong job numbers drove stock prices higher. Goldman Sachs predicts a CPI increase of around 0.3%, aligning with consensus estimates. However, even if this prediction holds true, there's still potential for market gains, particularly as it would support Goldman's forecast for a rate cut in July, an eventuality currently only marginally priced in by the market.
But there's a caveat: if tomorrow's CPI numbers reveal a significant increase, the Federal Reserve might not have enough time to adjust market expectations for a rate cut in July or even September, especially given recent comments from Fed officials questioning the rationale for rate cuts amid rising inflation. This would make a rate cut in 2024 less likely, as it would be too close to the November elections, inviting political backlash. Consequently, if rate cuts are off the table, the market could experience a downturn as it realizes the Fed's stance.
Despite the anticipation for tomorrow's CPI figures, there are reasons to believe inflation could slow down. One factor is a correction of the "January spike," where certain data adjustments inflated inflation figures. Additionally, the housing market, particularly the lag in reporting actual rents versus owner-equivalent rents, provides room for the Bureau of Labor Statistics (BLS) to manipulate inflation figures.
Looking ahead, Goldman Sachs expects a slight dip in core CPI, driven by factors such as car insurance rates stabilizing and health insurance costs moderating. However, shelter inflation is anticipated to remain relatively strong, albeit slightly decelerating. Other components like airfares and communication prices are expected to decline.
In terms of market reactions, Goldman traders foresee various scenarios depending on the CPI outcome. A hotter-than-expected print could lead to a sell-off across risk assets, while a cooler print might result in a relief rally, particularly in equities. Nonetheless, there's a cautious optimism prevailing, given the recent compression of implied volatility and the belief that even a hot CPI print might not derail the overall positive market sentiment, especially if the Federal Reserve maintains its dovish stance.
In summary, while tomorrow's CPI release is eagerly awaited, market dynamics suggest that even if the numbers deviate from expectations, the overall bullish sentiment could persist, underpinned by factors such as anticipated economic growth and supportive Fed policies.