Flawless Indicator Signals Big CPI Miss Tomorrow

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by Tyler Durden
Wednesday, Jan 11, 2023 - 11:44 PM

Yesterday we showed a matrix from JPM's Market Intel, which laid out what the bank thought would be the market's reaction to various CPI prints. The matrix, shown below, was summarized as follows: 85% odds of at least a 1.5% move higher in stocks (on a CPI print below 6.6%, and the lower the CPI, the higher the bounce); and 15% odds of a 2.5%-3% drop (on a CPI print > 6.6%). For those who missed it, here it is again:

  • PRINTS ABOVE 6.6%. This is a bearish outcome that may see the bond market reprice terminal rates higher as well as pushing up bond yields along the curve. If the Tues/Weds trading sessions are similar to Monday’s, then think you see the market give back these gains. If CPI prints above 6.8%, then think you are catching a tail event. One of the better plays would be shorting the JPM Cyclicals vs. Defensives Index. SPX down 2.5% - 3%; Probability: 15%.

  • PRINTS BETWEEN 6.4% - 6.6%. This is a bullish outcome and think this outcome produces a decline in vol across asset classes, finds support from both bonds and the USD. Given the moves ahead of the CPI print, the initial spike is likely faded through the session. Look for Tech to lead in this scenario. Consider the JPM Expensive Software Index as one of the best long plays along with negative Momentum. SPX +1.5% - +2%. Probability: 65%.

  • PRINTS BELOW 6.4%. This is a bullish outcome, but it seems unlikely to have a material change in the bond market unless you have a material “miss” to the downside, say 6.0% or lower. Stated differently, the largest change comes if the market reprices the Fed’s March meeting as a pause, which seems likely only if CPI prints below 4.5% - 5%. This outcome produces a +3% - +3.5% move in the SPX, with anything below 6.2% triggering a tail event. Probability: 20%.

Overnight Goldman also published a similar market matrix which is similar, if more granular to the bearish side: