Quick update - Get ready to sell risk on hot CPI
Pushing out the time toward Fed pausing will again be negative for risk assets
If I were to distill my overall view right here, I would say that everything in the market now is being driven by the distance in time toward the Fed pause/pivot point. How long in time until we get there? Equities have rallied off the lows from last Fed meeting and bonds have rallied because we have brought forward the time to Fed pivot and have taken out magnitude of the hikes by more than 3 hikes. Why? While it is not exactly clear to me, I guess growing recession narrative and lower oil prices have helped a bit. But tomorrow, on yet another hot CPI (could be over 1.2% mom and 9% yoy), I think we will once again extend the time toward Fed being able to pivot and that is the main reason why I remain negative on risk assets. The data is likely to confirm that we are still very far away from pivot/pause point because we are nowhere closer to clear and convincing evidence that inflation has truly peaked. While its possible that fixed income doesn’t materially sell off despite these continued elevated inflation readings even though we should be raising the odds of more hikes later this year (open up the door for 75 in Sept and 50+ in Nov), the idea that we continue to push out the time before the Fed can stop tightening is something that the equity market will not like. Implicit in the SPX today around 3800-3900 level is a view that the Fed will be back to cutting rates by 2Q23. My view is that these continued hot CPI prints will keep pushing out the timeline of that Fed pause and that will be negative for equity valuations because the data will make it extremely difficult for the Fed to be cutting that quickly. I expect us to take out the lows in stocks in short order and start carving out a lower range down toward where we were trading pre-covid in early 2020.
*Important Disclaimer: This blog is for educational purposes only. I am not a financial advisor and nothing I post is investment advice. The securities I discuss are considered highly risky so do your own due diligence.