The last two "meaningful" CPI positive surprises (Oct 2022 and Feb 2023) saw +4%-5% 5D rally = 180 to 225 points today. Thus, 100 point gain could be "low end" of a potential rally.

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Today’s note will include a short video update. We discuss that of the last 8 CPI reports, markets had a positive reaction 6 of  8 times.  The two “surprises” saw 4%-5% rallies, or +180-225 points.  Thus, our 100 points rally tactical call might be on the low side.  Is the Fed funds of 5.5% “higher for longer” if Core CPI is 3% by Dec 2024?  We don’t think so. Please click to view yesterday’s macro minute. (Duration 4:10 ).

The main event for this week, and arguably the main event for this month is the June CPI report. We even issued a “tactical Buy call” (100 points on S&P 500 by Friday this week) as we expect a material downside read on Core CPI of 0.25% or better MoM, compared to Consensus of +0.30%.

• Of the last 8 CPI reports, the S&P 500 has risen and in two of them, rallied strongly:
  – Oct CPI (11/10) +5.3% 5D rally
  – Feb CPI (3/14) +3.8% 5D rally
  – So, +4%-5% rally is 180 to 225 S&P 500 points
  – Thus, 100 points could be a “low end” on a CPI beat
• This is by no means a “done deal” but the probabilities are high that we will see a soft Core CPI reading. The simple drivers are Used Cars (1/3 of Core CPI rise) and the seasonal factors (benefitting June and July).
• But you might wonder how a “beat” would be so consequential. As we outlined in our comments and daily Macro Minute videos over the last two days, the driver is a downside read would materially impact how markets and the Fed view the trajectory of inflation.
• If this CPI print is +0.20% or so, the odds are very high that we will see +0.20% Core CPI prints for each of July and August CPI. That would make 3 consecutive months where Core inflation is running at 2.0%-2.5% and would make markets entirely rethink that path of future inflation.
• Core CPI of +0.20% or less would be the lowest since August 2021, and a complete break below the range that has been in place since the start of 2022. There has not been a Core CPI MoM print this low during that time.
• Used cars is an easy repeatable factor, as it added +0.14% to Core CPI for the last two months and could flip to a drag. And as Goldman Sachs’ Economics team exhaustively noted, the distorted seasonal adjustments due to pandemic and bullwhip supply chains mean Core CPI seasonal adjustments will push down CPI for the next few months. On top of that, housing will start to roll over.
• But think beyond this week, and where Core CPI might end up by Dec 2024. Goldman’s latest forecast is Core CPI falling to 3.0%. The June Core CPI YoY is probably 4.9%-5.0% YoY. So, core could drop 200pp in the next year.
• And the Fed funds is set to be 5.5% by the end of 2023. Does a 5.5% Fed funds make sense if Core CPI is 3.0%? See what I mean? It really raises the question whether “higher for longer” makes sense.

BOTTOM LINE: A June Core CPI positive print (+0.20% or less) would strengthen the case for stocks in second half

We still believe the highest probability is a large rally this week. And as we noted above, on the Oct 2022 and Feb 2023 CPI prints, the S&P 500 rallied the equivalent of 180 to 225 points.

• So 100 points this week could be a low end

• What would we be buying? Financial conditions are easing.
• So we would be buyers of Technology/FAANG (QQQ 1.55% ) and Industrials XLI 0.16%
• But we believe Cyclical growth would improve, favoring Energy XLE -0.92%  and Regional Banks KRE -0.66%
• And small-caps IWM 1.04%  likely get a bid, since this is the easiest way for many active managers to “catch up”

Recall, as we noted in our comments Monday evening, a Core CPI of +0.20% implies ex-shelter, a negative -0.04% — DEFLATION.

ECONOMIC CALENDAR: FOMC keyin July

Key incoming data July

• 7/3 10am ET June ISM ManufacturingTame
• 7/6 8:15am ADP National Employment Report Hot
• 7/6 10am ET June ISM ServicesTame
• 7/6 10 am ET May JOLTSTame
• 7/7 8:30am ET June Jobs reportMixed
• 7/10 11am ET Manheim Used Vehicle Index June FinalTame
• 7/12 8:30am ET June CPI
• 7/13 8:30am ET June PPI
• 7/14 Atlanta Fed Wage Tracker June
• 7/14 10am ET U. Mich. June prelim 1-yr inflation
• 7/15 Manheim Mid-Month Used Vehicle Value Index July
• 7/25 9am ET May S&P CoreLogic CS home price
• 7/25 10am ET July Conference Board Consumer Confidence
• 7/26 2pm ET July FOMC rates decision
• 7/28 8:30am ET June PCE
• 7/28 10am ET July Final U Mich 1-yr inflation

Key data from June

• 6/1 10am ET May ISM ManufacturingTame
• 6/2 8:30am ET May Jobs reportTame
• 6/5 10am ET May ISM ServicesTame
• 6/7 Manheim Used Vehicle Value Index MayTame
• 6/9 Atlanta Fed Wage Tracker AprilTame
• 6/13 8:30am ET May CPITame
• 6/14 8:30am ET May PPITame
• 6/14 2pm ET April FOMC rates decisionTame
• 6/16 10am ET U. Mich. May prelim 1-yr inflationTame
• 6/27 9am ET April S&P CoreLogic CS home priceTame
• 6/27 10am ET June Conference Board Consumer ConfidenceTame
• 6/30 8:30am ET May PCETame
• 6/30 10am ET June Final U Mich 1-yr inflationTame

Key data from May

• 5/1 10am ET April ISM Manufacturing (PMIs turn up)Positive inflection
• 5/2 10am ET Mar JOLTSSofter than consensus
• 5/3 10am ET April ISM ServicesTame
• 5/3 2pm Fed May FOMC rates decisionDovish
• 5/5 8:30am ET April Jobs reportTame
• 5/5 Manheim Used Vehicle Value Index AprilTame
• 5/8 2pm ET April 2023 Senior Loan Officer Opinion SurveyBetter than feared
• 5/10 8:30am ET April CPITame
• 5/11 8:30am ET April PPITame
• 5/12 10am ET U. Mich. April prelim 1-yr inflation Tame
• 5/12 Atlanta Fed Wage Tracker April Tame
• 5/24 2pm ET May FOMC minutesDovish
• 5/26 8:30am ET PCE April Tame
• 5/26 10am ET U. Mich. April final 1-yr inflation Tame
• 5/31 10am ET JOLTS April job openings

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