Was There a Secret in Today's CPI?

CPI Released Today and Markets Reacted Like the World Was Ending... Is It?

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This week CPI and PPI are the heavy-hitter data releases. CPI was released this morning, and PPI will be released tomorrow.

As is its habit lately, the market decided to completely spazz out over CPI.

If you watched the releases and charts last week you’ll recognize this pattern. Data releases, futures sell off, futures buy back, market opens, everyone sells everything.

It remains to be seen if the bounce emerging as I’m writing this lasts.

As I wrote on Sunday, we wanted to add hedges on any bounces. I added QQQ and IWM puts on both Monday and Tuesday.

I share real-time trades like that in the chat. If you aren’t in the chat, join here.

Because of the outsized reaction to CPI, I wanted to quickly explain the report and how the market is reading it.

First, though, let’s take a quick look at last night's debate, as it is necessary in the context of today’s PA.

The Debate

This will be a short section because I don’t have a lot of interest in writing about all the insane things that took place in the debate itself. Suffice it to say, I went to bed the most depressed I’ve ever felt about American Politics.

According to the betting markets, there was never much chance that Trump would win the debate. Partly, this is because Trump has lost, I believe, every other debate he has been in, according to the polls.

There is probably some bias in the way these things are scored.

Nevertheless, Trump lost, as expected. As an observer, I thought he did very poorly qualitatively. He chased the wrong topics and seemed uncomfortable with the 2-minute response times. He would have 30 seconds of cogent answers hidden among a full 2 minutes of rambling.

It remains to be seen how much of an impact this will have on the race.

Historically, debates haven’t had a considerable impact. That’s the accepted political science party line, at least. The obvious exception is the Trump v. Biden debate this year.

Still, during the debate, the markets were unsettled. USDJPY tested 141, breaking it and then reclaiming it. The dollar sold off in general as the debate went on.

Today, green energy ETFs pumped, DJT sold off, in a general unwind of the Trump Trades. If you want to read more about the precise nature of the Trump trades, I recommend you check out

Citrini

’s excellent and detailed piece.

Broadly speaking, Kamala is bad for risk and coins but good for stocks that benefit from fiscal primacy (think anything close to government spending) and green energy policy. I think she is probably also good for military industrial stocks.

This isn't good news if your portfolio is constructed anything like mine.

All equities will generally come under de-risking pressure if Kamala takes the lead in the polls.

Right now it is basically 50/50.

I will write more about this as it develops, but it’s something to keep an eye on.

Let’s leave it here for now and move on to happier topics.

Is CPI Heralding the End of the World?

I wanted a dramatic header to follow up the line about moving on to happier topics…

Let’s talk about CPI.

CPI came in right on the money at 2.5%, down from 2.9% in July. Core CPI, which excludes energy and food, came in a touch hotter than expected at .3% M/M, and 3.2% Y/Y.

One Month CPI Change

Core CPI is the Fed’s preferred measure for making policy decisions because it explicitly excludes the two most variable parts of CPI. The downward trend in core CPI is still very compelling and convincing, but it remains above the Fed’s target.

SOFR future immediately priced down the chance of a 50bps hike to ~15%.

As I’ve been arguing that we will enter a recession unless the direction of the economy changes, and that change should start with a 50bps hike, this is a concerning development.

It looks like, so far, stocks agree.

PPI is tomorrow morning, but it’s unlikely to change much. I think even if PPI were to come in cold, it would only be considered bad news at this point because it would highlight the dilemma we are all in: the economy is cooling, but the Fed has to be careful what they do about it.

However, CPI is a very general number, and many components have their own nuance. Let’s examine the report in detail to see what we can glean about the real state of the economy, and how sticky inflation is likely to be.

Below, I answer the question “What did the CPI really say about the economy?” in depth, pulling data from the 38-page BLS CPI report. This is a true source of alpha. Subscribe to get access to this analysis and others as they come available.