Inflated Expectations: Why the Reaction to the CPI Report Is Critical

It's Tuesday, so it must be CPI Day. The much anticipated consumer price index inflation report will be out, perhaps by the time you read this.

You already know my view on this important economic statistic, but the reaction to the print is key. Should we get a lower-than-expected reading and the market sells off on the news, then that was priced in. Should we get a higher-than-expected reading and the market rallies, that would be a shocker and in my view might change sentiment.

And this report comes at an important juncture in the market.

You see, the Russell 2000 and the S&P 500 have been green for four-straight days. The Russell hasn't gone to five since June of 2021. That's a long time. The S&P hasn't gone to five since November 2021 and while not as long ago, it is when so many date the beginning of the bear market to that date. Therefore, should either or both of these well-watched indexes close green on the day, we would have to take that as a slight change in the market.

What I find curious is that so few are talking about stocks, but rather their focus is on bonds. And, boy, is the bond action what has them bearish. Typically stocks and bonds will rally together, but in the last week bonds have gone down, rates up, while stocks have rallied nearly 6%. That's quite a divergence.

The chatter right now is a bit more than a low hum, it's more like rising voices as folks, one after the other, cite higher rates, while stocks are rallying as bearish.

Here's something else that is interesting, even if it is anecdotal. At those two arrows on the chart of the iShares 20-Plus Year Treasury Bond   (TLT) my inbox was full of folks asking what the Daily Sentiment Index (DSI) was on bonds and if they were oversold enough. My response at the time was that the DSI said nothing bullish and bonds might rally, but they didn't have my interest on the buy side.

Here we are, leading into the CPI and bonds can't pick themselves up off the mat and my inbox is empty, no one cares to even ask what sentiment is or if bonds are oversold. Well I am here to report that the DSI on bonds is now 14.

If that CPI print takes bonds lower (rates up) I suspect the rising voices on bonds will become full-blown crescendos and it will be non-stop "Henny Penny the sky is falling"-type stuff when it comes to bonds. Yet that ought to scoot the DSI down into single digit territory that would make them a buy.