Why I’m Looking to Buy a Negative Reaction to a Hot CPI Report
CPI will be released this morning and will determine what the Fed does next week.
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The market is bouncing early Friday as investors await the August CPI report at 8:30 a.m. This report will likely determine whether the Fed hikes rates next week.
Investors have been quite nervous recently but futures are indicated higher Friday morning with the S&P 500 up about 39 points and the Nasdaq up 155, as I write. Oil is off its highs, and bonds are bouncing off the worst levels. This is just oversold bounce action into a binary event so don’t read anything into it.
The Setup Into the Number
The pressure on the market has been building all week. The 10-year Treasury closed at 4.943% Thursday, its highest close since October 2023 and on the cusp of 5%. Diesel crossed $6 a gallon nationally for the first time, which is a record and up more than 60% in a year. Brent touched $107 Thursday, and September rate hike odds jumped to 71% from 49% a week ago.
There is a notable split between what the market expects and what economists expect. A Bloomberg survey found only 13 of 48 economists see a hike this month, and a majority expect the Fed to hold steady through the end of 2027. They cite the moderation in inflation and the proximity of the midterm elections, with the October meeting falling days before the November 3 vote.
That is a wide gap from the 71% the futures market is pricing for a hike, and it reflects how much uncertainty Fed Chair Warsh has created by refusing to signal. Nearly all of the economists add the same caveat. Any uptick in inflation changes the calculation, which is exactly why Friday morning’s number carries so much weight.
There is substantial tension between the best move economically and the political ramifications. Economists think the political pressure will prevent the Fed from acting while investors are very nervous about inflation and bonds.
Why a Hot Number Might Be the Better Outcome
My view is that a hot CPI that makes a Fed hike highly certain may be the better outcome at this point. A hot number and a Fed hike will allow the market to price in the Fed’s hawkishness rather than keep speculating about it. Uncertainty is what has been grinding this market down for two weeks, not the rate level itself. Once we know the Fed is going to act, the endless speculation will stop.
The hike odds have swung from 35% to 58% to a coin flip to 71% in the span of eight sessions, and every one of those swings has been a source of volatility. A confirmed hike ends that. The market can absorb a known quantity instead of moving on fear of the unknown.
A softer CPI is the outcome that sounds good but may actually lead to more difficult market action. It would leave the question of what comes next wide open. The Fed might hold, or it might hike anyway on the argument that the last two or three readings matter less than the oil and the war ahead. A soft number does not resolve anything and an unresolved issue is what opens the door to more selling.
Game Plan
My game plan is simple. Wait and see how this sorts out. There is no benefit to betting on the outcome of a number that could break either way and produce an outsized move in whichever direction it surprises.
If we do get a hot number and a negative reaction I will be looking to buy into the weakness because the market will finally have the information needed to fully price in its fear about rate hikes. If we rally on a soft number I will not be chasing the strength. I do not trust a rally at this point to be sustained.
Bad news will probably be easier to buy than good news. We will see what happens.
At the time of publication, Rev Shark had no positions in any securities mentioned.
