A "hot" August CPI does not end equities, but it will raise the level of skepticism of Fed progress. Of last 6 CPI "misses" (hot), equities gained 4 of 6 times.

Tom Lee, CFA
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A hot August CPI does not end equities, but it will raise the level of skepticism of Fed progress. Of last 6 CPI misses (hot), equities gained 4 of 6 times.
A hot August CPI does not end equities, but it will raise the level of skepticism of Fed progress. Of last 6 CPI misses (hot), equities gained 4 of 6 times.

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We discuss how consensus is now leaning towards a “hot” Aug core CPI.  This does not necessarily hurt equites as of the last 6 “hot prints” stocks rallied 4 of the 6.  Plus, it all comes down to details and how bonds react (Duration: 5:43).

A hot August CPI does not end equities, but it will raise the level of skepticism of Fed progress. Of last 6 CPI misses (hot), equities gained 4 of 6 times.

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August CPI is released Wednesday morning at 8:30am ET. Reviewing Street consensus (see below), it seems like the Street is ready for a “hot” CPI print, above the Core MoM consensus of +0.20%. In fact, the closely watched Goldman Sachs estimate is +0.24% Core.

  • On the surface, this feels like a possible disappointment, because this breaks the string of 2 consecutive months of Core CPI MoM of +0.16% or lower. A +0.24% MoM is still impressive because it is 2.88% annualized, but we all know that markets care about “on the margin” and this, on the margin, is a miss.
  • Our data science team, led by “tireless Ken,” looked at the last 10 CPI prints and subsequent equity market reaction:
    – 6 saw Core CPI MoM “hotter” than consensus (above) +0.01% to +0.10%
    – 4 of 6 times, equities gained in the following week
    – 5 of 6 times, equities gained on the day of CPI
  • So, perhaps this is not entirely bad news, even if it feels like a miss. Why? I think it depends on the details. In our view, the monthly CPI reports are subject to noise and variability and the source of higher CPI is often idiosyncratic. The key, in our view, is that shelter and vehicles represent 57% of Core CPI and 71% of the rise in Core CPI.
    – used cars are set to fall 10% and perhaps as much as 29% over next few years
    – shelter CPI is lagging real-time measures
  • So our take is that Core CPI is set to soften. In fact, there remain more “green shoots” of disinflation. Bloomberg had an article Tuesday (link–> here) highlighting that Adobe ADBE tracking shows online good prices fell -3.2% in August, a sign of outright deflation. And this is the largest decline in 3.5 years and one has to go to depths of pandemic crash to see such declines.
  • Moreover, Fed funds futures have calmed down a bit and the odds of a November hike are back down to 35% from >48% a few weeks ago. It could jump today (9/13) though.
  • Equity markets are most closely watching yields and it will be important for US 10-yr yields to soften from the current 4.28%, although Mark Newton has warned this could surge to >4.35% near-term. That would pressure stocks.
  • This ultimately shows how stocks have again become a “game of inches” and September is shaping up to be tough.

Bottom line: We worry of a “hot” CPI but we think stocks likely power through that

We still have the view that weakness in September is front loaded. But equities sure feel pretty nervous. I guess we should expect some relief today, even if CPI is not great. That said, this is a stark reminder that we are in a period of transition in consensus thinking:

  • Many are convinced the US is heading for a hard landing vs our “soft” view. There is no decisive break year
  • Many are convinced that inflation is sticky and will surge again as US economy picks up momentum. A “hot” CPI will bolster this argument, but our view is inflation is set to track lower.
  • Sentiment is cautious and the latest BofA Fund Manager Survey (FMS) shows Bonds, Healthcare and Utilities are the Overweights.

We would like to see a “soft” Core CPI of +0.16% to +0.18% but consensus seems to be shifting towards a higher number.

A hot August CPI does not end equities, but it will raise the level of skepticism of Fed progress. Of last 6 CPI misses (hot), equities gained 4 of 6 times.

A hot August CPI does not end equities, but it will raise the level of skepticism of Fed progress. Of last 6 CPI misses (hot), equities gained 4 of 6 times.
Source: X.com

A hot August CPI does not end equities, but it will raise the level of skepticism of Fed progress. Of last 6 CPI misses (hot), equities gained 4 of 6 times.
Source: Bloomberg

A hot August CPI does not end equities, but it will raise the level of skepticism of Fed progress. Of last 6 CPI misses (hot), equities gained 4 of 6 times.

A hot August CPI does not end equities, but it will raise the level of skepticism of Fed progress. Of last 6 CPI misses (hot), equities gained 4 of 6 times.
A hot August CPI does not end equities, but it will raise the level of skepticism of Fed progress. Of last 6 CPI misses (hot), equities gained 4 of 6 times.
A hot August CPI does not end equities, but it will raise the level of skepticism of Fed progress. Of last 6 CPI misses (hot), equities gained 4 of 6 times.
Source: X.com

A hot August CPI does not end equities, but it will raise the level of skepticism of Fed progress. Of last 6 CPI misses (hot), equities gained 4 of 6 times.
Source: BofA FMS Survey

A hot August CPI does not end equities, but it will raise the level of skepticism of Fed progress. Of last 6 CPI misses (hot), equities gained 4 of 6 times.
Source: BofA FMS Survey

Key incoming data September

  •  9/1 8:30am ET August Jobs Report Tame
  •  9/1 10am ET August ISM Manufacturing Tame
  •  9/6 10am ET August ISM Services Mixed
  •  9/6 2pm ET Fed releases Beige Book Tame
  •  9/8 9am ET Manheim Used Vehicle Index August Final Tame
  •  9/8 2Q23 Fed Flow of Funds Report Tame
  •   9/13 8:30am ET August CPI
  •  9/14 8:30am ET August PPI
  •  9/15 8:30am ET September Empire Manufacturing Survey
  •  9/15 10am ET U. Mich. September prelim 1-yr inflation
  •  9/18 8:30am ET September New York Fed Business Activity Survey
  •  9/18 10am ET September NAHB Housing Market Index
  •  9/19 9am ET Manheim September Mid-Month Used Vehicle Value Index
  •  9/20 2pm ET September FOMC rates decision
  •  9/21 8:30am ET September Philly Fed Business Outlook Survey
  •  9/22 9:45am ET S&P Global PMI September Prelim
  •  9/25 10:30am ET Dallas Fed September Manufacturing Activity Survey
  •  9/26 9am ET July S&P CoreLogic CS home price
  •  9/26 10am ET September Conference Board Consumer Confidence

Key incoming data August

  • 8/1 10am ET July ISM Manufacturing Tame
  • 8/1 10am ET JOLTS Job Openings Jun Tame
  • 8/2 8:15am ADP National Employment Report Hot
  • 8/3 10am ET July ISM Services Tame
  • 8/4 8:30am ET July Jobs report Tame
  • 8/7 11am ET Manheim Used Vehicle Index July Final Tame
  • 8/10 8:30am ET July CPI Tame
  • 8/11 8:30am ET July PPI Tame
  • 8/11 10am ET U. Mich. July prelim 1-yr inflation Tame
  • 8/11 Atlanta Fed Wage Tracker July Tame
  • 8/15 8:30am ET Aug Empire Manufacturing SurveyMixed 
  • 8/15 10am ET Aug NAHB Housing Market IndexTame
  • 8/16 8:30am ET Aug New York Fed Business Activity SurveyNeutral
  • 8/16 2pm ET FOMC MinutesMixed 
  • 8/17 8:30am ET Aug Philly Fed Business Outlook Survey Positive
  • 8/17 Manheim Aug Mid-Month Used Vehicle Value IndexTame
  • 8/23 9:45am ET S&P Global PMI Aug PrelimWeak
  • 8/25 10am ET Aug Final U Mich 1-yr inflationMixed
  • 8/28 10:30am ET Dallas Fed Aug Manufacturing Activity Survey Tame
  • 8/29 9am ET June S&P CoreLogic CS home price Tame
  • 8/29 10am ET Aug Conference Board Consumer Confidence Tame
  • 8/29 10 am ET Jul JOLTS Tame
  • 8/31 8:30am ET July PCE Tame
  • 9/1 8:30am ET August NFP jobs report
  • 9/1 10am ET August ISM Manufacturing

Key incoming data July

  • 7/3 10am ET June ISM Manufacturing Tame
  • 7/6 8:15am ADP National Employment Report Hot
  • 7/6 10am ET June ISM Services Tame
  • 7/6 10 am ET May JOLTS Tame
  • 7/7 8:30am ET June Jobs report Mixed
  • 7/10 11am ET Manheim Used Vehicle Index June Final Tame
  • 7/12 8:30am ET June CPI Tame
  • 7/13 8:30am ET June PPI Tame
  • 7/13 Atlanta Fed Wage Tracker June Tame
  • 7/14 10am ET U. Mich. June prelim 1-yr inflation Mixed
  • 7/17 8:30am July Empire Manufacturing Survey
  • 7/18 8:30am July New York Fed Business Activity Survey
  • 7/18 10am July NAHB Housing Market Index in-line
  • 7/18 Manheim July Mid-Month Used Vehicle Value Index Tame
  • 7/25 9am ET May S&P CoreLogic CS home price Tame
  • 7/25 10am ET July Conference Board Consumer Confidence Tame
  • 7/26 2pm ET July FOMC rates decision Tame
  • 7/28 8:30am ET June PCE Tame
  • 7/28 8:30am ET 2Q ECI Employment Cost Index Tame
  • 7/28 10am ET July Final U Mich 1-yr inflation Tame

Key data from June

  • 6/1 10am ET May ISM Manufacturing Tame
  • 6/2 8:30am ET May Jobs report Tame
  • 6/5 10am ET May ISM Services Tame
  • 6/7 Manheim Used Vehicle Value Index May Tame
  • 6/9 Atlanta Fed Wage Tracker April Tame
  • 6/13 8:30am ET May CPI Tame
  • 6/14 8:30am ET May PPI Tame
  • 6/14 2pm ET April FOMC rates decision Tame
  • 6/16 10am ET U. Mich. May prelim 1-yr inflation Tame
  • 6/27 9am ET April S&P CoreLogic CS home price Tame
  • 6/27 10am ET June Conference Board Consumer Confidence Tame
  • 6/30 8:30am ET May PCE Tame
  • 6/30 10am ET June Final U Mich 1-yr inflation Tame

Key data from May

  • 5/1 10am ET April ISM Manufacturing (PMIs turn up) Positive inflection
  • 5/2 10am ET Mar JOLTS Softer than consensus
  • 5/3 10am ET April ISM Services Tame
  • 5/3 2pm Fed May FOMC rates decision Dovish
  • 5/5 8:30am ET April Jobs report Tame
  • 5/5 Manheim Used Vehicle Value Index April Tame
  • 5/8 2pm ET April 2023 Senior Loan Officer Opinion Survey Better than feared
  • 5/10 8:30am ET April CPI Tame
  • 5/11 8:30am ET April PPI Tame
  • 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 minutes Dovish
  • 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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