Even a Warm CPI Might Be Too Hot for Investors
Even if the number comes in better than expected, technical conditions remain challenging and the odds of a negative reaction have increased.
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One of the primary driving forces behind the market uptrend, which began in April, is lower-than-expected inflation. The experts and pundits have been consistently incorrect about how tariffs would impact inflationary pressures. This negative anticipation has resulted in poor positioning, which has provided a steady catalyst for more market upside and a new all-time highs.
The latest Consumer Price Index numbers will be released on Tuesday at 8.30 a.m. ET, and many economic bears are still looking for hot numbers. They are convinced that tariffs will eventually drive an uptick, but they have not been able to predict when it would happen.
The last few CPI reports have been lower than expected and triggered more market upside. That has caused expectations for a hot report to decline this time, so it may not be as big of a surprise if CPI comes in cool again.
If CPI does come in hot, it will change the odds a Fed rate cut at its next meeting in September and it will also cause worries about stagflation due to the downward revisions in employment that occurred on Aug. 1. Investors have shrugged off the poor employment numbers, primarily because it increased the likelihood of a Fed rate cut. But a hotter-than-expected CPI report would complicate the matter considerably.
With the indexes hovering near the highs and the start of negative seasonality, the odds of an adverse reaction to CPI have increased. Even if the number is one that would be normally acceptable to investors, a greater likelihood remains of a negative reaction because the technical conditions.
The market action looked a little tired on Monday afternoon, and there was a poor close on weak breadth. Technically, a further pullback would probably be healthy as it would allow for some resets and give dip buyers a better opportunity to put some cash to work.
We’ll see how things unfold, but even if CPI is friendly, the market may not have enough juice for a positive response.
At the time of publication, DePorre had no position in any security mentioned.
