Brief Overview of Thursday CPI Report
- A significant decline in the stock market is possible if the CPI number is announced as higher than expected in Thursday CPI Report.
- There are a chance inflation’s negative effects won’t show up in this study.
- This can cause a breakdown in technical support for the S&P 500.
- Try to get some assistance on the market. When you join Reading The Markets, you have access to unique insights and expert advice that can help you succeed in any market.
Forecasts for tomorrow’s publication of the consumer price index indicate another strong showing, with annual and monthly increases of 8.1% and 0.2%, respectively. Predictions suggest a 6.5% annual increase and a 0.4% monthly increase in the Core CPI.
There won’t be another CPI data until the November FOMC meeting. Even though the Thursday CPI Report won’t affect Fed policy in November, it may influence the central bank’s decision-making in December.
The need for the Fed to increase rates by 75 basis points at that December meeting might be exacerbated by hotter-than-expected CPI data and a stronger-than-expected employment report. Rates are expected to be at 4.14% by Fed Funds futures as of right now. That’s roughly 25 basis points below what the Fed had predicted (4.4%).
According to recent Fed Funds futures, more rate rises of 125 basis points are expected before the end of the year. The Fed Funds futures curve might shift higher if the market prices in 150 basis point more rate rises this year in response to a higher-than-expected CPI.
Are Temperatures Rising Above Predictions?
The shelter is the most significant contributor to the CPI report, making over 32% of the index. The shelter portion is anticipated to remain high since the Zillow Rent Index for All Homes in the United States increased by 0.5% in September. If energy costs, like those for gasoline, don’t fall in September, we won’t see the same downward pressure we had in July and August. With gasoline making up almost 5% of the index, its price stability in September was notable.
According to the Manheim Used Vehicle Index, used automobile prices dropped 3% in September compared to August’s 4% drop. This might imply that the negative effect of the drop in used automobile prices in September was less severe than in August.
Not Good for Stocks
If the Consumer Price Index (CPI) is higher than predicted in the Thursday CPI Report, interest rates will likely be repriced, reducing the value of equities again. Most significantly, stock prices have lagged behind actual yield increases. Consider the present 3.3% gap between the NASDAQ 100 earnings yield and the actual yield on a 10-year government bond. Since 2009, the gap between actual rates and the NASDAQ has been narrowing. That indicates that stock prices are very high relative to actual interest rates.
It also shows that the NASDAQ’s decline in 2022 hasn’t been nearly enough to keep up with the increase in real yields. This necessitates a further decline in the NASDAQ.
Market Crash of 2008
The equities market might yet see a steep fall depending on how this bear market develops relative to past cycles. If the bear market cycle of 2008 is any indication, the S&P 500 in 2022 might decline much more between now and the end of October.
In theory, it might work. The technical chart shows that the S&P 500 has reached a key support level of 3,580. In other words, that degree of help was initially promised in September 2020. If support fails, there are multiple gaps to close before we reach 3,230, or about 11%. This drop might come quickly since these positions are currently vacant.
A higher-than-expected CPI data looks more worrisome than an in-line report right now since it is unlikely to alter the course of monetary policy or alter market expectations. An in-line or cooler-than-expected Thursday CPI Report might spark a relief bounce in the stock market, but investors shouldn’t get their hopes up too high since it’s doubtful that monetary policy would be much altered.
Featured Image- Megapixl @ Anastasiasamal
Author Shariq Khan 
