Our Take on the CPI, and How We Might Respond With This Holding

This morning the consumer price index report lands. The consensus forecast sees the headline print falling to 3% on a year-over-year basis and up 0.2% compared to June. The market essentially sees headline inflation staying flat on a year-over-year basis. The July core inflation reading is expected to make some progress, falling to 3.2% compared to June 2023, which would put it at the lowest level in some time. But the sequential core figure is expected to rebound modestly to 0.2% from June’s 0.1%.

Here's the thing, if we see a positive surprise in the CPI data, which would mean the July figures coming in below the market forecast, odds are we will see the market continue yesterday’s move higher. That jaunt was led by the better-than-expected July producer price index (PPI) figures and the growing confidence in the market that the Fed is poised to enter a rate-cutting cycle. In yesterday’s video, we said that we could see that unfolding. But for now we still have our doubts about a half-percentage point rate cut in September. The trifecta of other July economic data coming this week for retail sales, industrial production, and housing starts and their impact on current quarter's gross domestic product expectations may bring some clarity.

If we see the market’s reaction to the July CPI report mimic what we saw yesterday, it will likely lift our holdings further. In keeping with our recent downgrade of Coty  COTY to a "Four," and our plan to use market strength to work our way out of that position, that could pave the way for us to make more progress on that front. We’ll also continue to watch other positions relative to our price targets, position sizes in the portfolio, and significant moves relative to the market, something we discussed during yesterday’s Portfolio Office Hours.

At the time of publication, the Pro Portfolio was long COTY.