August CPI Roasts Bulls

Stocks plunged this morning following a scorching inflation reading. The Dow, S&P, and Nasdaq Composite all rocketed lower at the open as tech shares endured the brunt of the selling.

The Consumer Price index (CPI), released at 8:30 am EST, showed that headline inflation rose 8.3% year-over-year (YoY) last month, easily surpassing the consensus estimate of just 8.1%.

Headline inflation, which includes food and energy prices, climbed 0.1% month-over-month (MoM), beating the -0.1% MoM estimate despite tumbling energy costs. Gasoline prices dropped over 10% MoM in August and yet the monthly headline number was still positive.

The most shocking print of the report, however, was the monthly core gain (which excludes food and energy) as the Fed has historically favored core over headline when making changes to monetary policy.

Core prices rose 0.6% MoM (vs. 0.3% MoM expected) in August, doubling the estimated figure. Shelter costs (+0.7% MoM) led the core group higher.

It was a bad CPI release overall that came at an inopportune time for bulls following the market’s recent pseudo-squeeze.

“[Core CPI] suggests that underlying price pressures remain firm and suggests the Fed’s work is only just beginning. We continue to expect a 75bp rate hike in September and for a terminal funds rate of 4.0-4.25% early next year,” said Bank of America’s Michael Gapen.

He continued, adding that “solid employment gains alongside firm core inflation readings, in our view, point to additional monetary policy tightening and hard landing risk […] The outlook for the US economy includes a mild downturn in 1H 2023 and a restoration of price stability in 2024.”

As for what that means for stocks in the short term, Abrdn investment director James Athey perhaps put it best in a morning note to clients.

“The recent bounce in equities looked incredibly ill-judged and premature,” Athey said.

“That CPI number is very strong relative to consensus and will not be what the Fed wanted to see at all. The chance of the pace of hikes slowing after September has receded somewhat as a result of this data but of course, the reality is that what happens in Q1 2023 is still very much an open question.”

In other words, inflation hasn’t eased as quickly as investors would have liked, and that means stocks should face significant bearish pressure moving forward. It’s no surprise that stocks fell so abruptly this morning.

But will they continue to fall leading up to the September rate hike next week? Maybe, maybe not. Don’t forget that the market was sitting on a “bullish powderkeg” of put options ready to be sold in the event of another strong day for stocks. If the market reverses higher in the next few trading sessions, the short squeeze could very well be “on” once again.

“The velocity of this move has been breathtaking, however, the market has recovered substantially off of recent lows,” said KKM Financial CEO Jeff Kilburg.

“That this 4,000 level is still holding for the S&P 500 does reveal the fact that markets are bothered, but markets are not panicking.”

But if the S&P falls below 3,900 again, you could probably call off the pre-FOMC rally for good. Until then, though, there’s a chance that bulls could right the ship (in the short term, at least) in the face of rising rate hike expectations. That’s exactly what happened prior to Powell’s speech at Jackson Hole.

And could very well happen again, even after this morning’s “hot” CPI reading.


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