"We Have Reached A Turning Point": Trader Explains Why Today's CPI Could Send Equities Reeling

From the latest Macro View by Bloomberg commentator and former Lehman trader, Mark Cudmore

Equities Must Fear CPI Now the Fed Put Era Is Over

A surprise in either direction from today’s U.S. consumer price index print is likely to hurt global stocks.

For many years, in the wake of QE, we became used to markets where “good data is good for equities and bad data is good for equities.” The logic was that bad data implied a greater likelihood more liquidity would be pumped into the system, whereas good data inspired confidence that the economic recovery was on track.

Today might mark a turning point where we more frequently trade the opposite dynamic. The Fed has fought so hard to convince investors that the economy can cope with hikes and balance-sheet reduction that it may have boxed itself into a corner. It can’t retreat from its policy path without seriously undermining its credibility.

If CPI misses to the downside, then investors will fear the Fed is making a terrible policy mistake with its determination to raise rates again in December. On the flip-side, if CPI beats, then traders will have to price in a much greater possibility that the Fed follows through on its forecast of three more hikes in 2018.

That level of tightening is still absolutely not priced into asset markets. The acceptance that policy normalization is a sustainable theme would alter the whole trading framework, because forecasts for funding and discount rates would have to be entirely revised.

That’ll be negative for global equities, emerging markets and commodities, but the most acute pain is likely to be in U.S. stocks, where a generation of investors have been programmed to believe the Fed will always have their back.

If inflation slows again and the Fed doesn’t backtrack on its policy tightening, then this trading dynamic might become increasingly similar for all major U.S. data releases. It’ll be an era of “bad data is bad for equities and good data is bad for equities.”

Disappointing data will be portrayed as a sign that the financial-market guardians are sleepwalking toward disaster. Positive data will cause global equity markets to sell-off as they register that rate hikes are coming much quicker than priced.

The new dynamic won’t necessarily sustain for months, let alone years, but we may have reached the crucial point where asset markets will throw a tantrum until we get clarity on whether it’s the Fed or rates markets that need to give ground.

Expect equity pain to continue in the short term while this plays out.

Comments

eclectic syncretist 1 Alabama Wed, 11/15/2017 - 08:50 Permalink

https://www.bls.gov/news.release/cpi.nr0.htmIt would be fucking hilarious if it wasn't so sad. Our government conspiring with the Federal Reserve to produce inflation numbers that are so goal-seeked they have little or no relationship to reality at all, and then using these falsified numbers to set interest rate policy. A colossal fraud that has hurt hundreds of millions of hard-working American's, by falsely encouraging them not to save.The perpetrators should be justly punished for these high crimes.

In reply to by 1 Alabama

any_mouse Wed, 11/15/2017 - 07:39 Permalink

CPI, that's one of those made up values. Like the unemployment rate.

Why do the markets react at all to made up numbers?

Just End the FED.

We know we are heading to disaster, so why not make it a great sign off party.

Last of the Mi… Wed, 11/15/2017 - 07:54 Permalink

For many years, in the wake of QE Good one! First line, first sentence, implying QE is over. Not a chance, my friend, not a chance. The rest of the article is immaterial because it is instantly based on a false assumption. 

vegas Wed, 11/15/2017 - 08:06 Permalink

Oh yes, do tell ... been hearing this since the SP500 was 1000 points lower, starting with the Yuan devaluation back in Augsut 2015. Fed put gone? I'll believe that when I see it. It doesn't matter how much it goes down; what matters is when the "Plunge Protection Team" shows up, how high are they willing to bid it up? www.traderzoogold.blogspot.com

wonger Wed, 11/15/2017 - 08:09 Permalink

They make up the economic data according to market participants positioning, its an excuse to drive the markets in a certain direction, simples 

NYC_Rocks Wed, 11/15/2017 - 08:09 Permalink

No one can predict the markets.  The author fails to point out that the problems are (i) the CPI doesn't represent reality and (ii) the central banks are interfering so much that they obviscate the direction that rates would obviously go naturally  - up.  If we had real, stable money that was chosen by the market, we wouldn't have gone into so much debt across the globe. Free markets would have prevented it.  It's all a political game by a group of idiots.