8:30AM EST Be PREPARED
Is the Market Poised for a Rebound?
- Rate hikes in 2022 continued in a very fast progression due to Inflation rising much higher than the Federal Reserve's Target of 2%. This forced the Federal Reserve to raise rates at a very fast pace in the tune of:
March: +25bps
May: +50bps
June: +75bps
July: +75bps
September: +75bps
November: +75bps
December: +50bps
February: ???
-This February the market is currently pricing in a +25bps hike. This is a further easing of the previous +50bps hike that occurred in december. See Fig. 1 below.
Fig. 1
- Fig.1 Currently we have a 76% chance (Left Bar) of a +25bps hike occurring on February 1st, 2023. There is a 23% chance of a +50bps hike occurring.
Fed Funds Rate Probabilities for the Rest of the Year
Fig. 2
.
-Fig. 2 Shows the pausing of rate hikes to occur in May of 2023. This is the most bullish signal of the year so far and CPI plays a massive role in the probabilities stated above. CPI is the driving factor of the 2022 aggressive rate hikes and it will be the factor for the pausing of rate hikes later this year.
CPI Predictions and Probabilities
Fig.3
United States Inflation Rate
-Fig.3 is the Inflation rate charted from December 2021 to November 2022. As seen, CPI is currrently downtrending to levels not seen since December of 2021. This is quite bullish because it signals that the Federal Reserves aggressive Fed Funds Rate Hikes have worked. Tomorrow this number must decrease further if the market is to remain bullish.
Fig. 4
- Fig. 4 is the current Estimates for the CPI numbers coming out at 8:30am ET tomorrow (Jan, 12, 2023). Currently the market is expecting a large drop in CPI down the whole way to 6.5%.
How Do We Trade This?
If CPI is >/= 7.0: The market will react NEGATIVELY. This would increase the fear that Inflation may not be under control yet which would force the Federal Reserve to possibly raise or hold rates for longer than currently priced in. IF CPI is greater than 7.1 this should be EXTREMELY BEARISH. This is when you must short anything and everything although, this is not a likely scenario to occur.
If CPI is <6.5: The market will react POSITIVELY. This would increase the probability that CPI will decrease for the coming months ahead which in turn helps the Federal Reserve to ease monetary policy. Since 6.5% is the estimate, only a number below this would be very bullish since the expectation is 6.5%.
If CPI is >/=6.5 and <6.9: Then the market will have an interesting decision to make. Is this good or bad? We will most likely sell off slightly if we come in above 6.6% and below 6.9% because the market has rallied a lot in the past week and if the expectation is 6.5% then possibly anything at or above 6.5% could be seen as neutral which generally means the market will sell off since we are still in a massive weekly downtrend.
What is the Most Likely Scenario?
Fig. 6
- Fig. 6 According to JPMorgan we have a 20% chance of a CPI below 6.4%, and a 15% chance that we get a reading above 6.6%. They are giving a 65% chance that we are at or 0.1% away from the consensus number of 6.5%.
Since the Street is pricing in the expected consensus number which is 6.5% then we should most likely expect a number at or very close to 6.5%. Unfortunately, to get a serious move where trend continuation is very strong and there is easy money to be made, we must have the CPI print ABOVE 6.8% or BELOW 6.5% for the market to be truly shocked enough to cause large institutions to take part in the price action. Below is an article speaking upon the "10 major banks" that expect price pressures to ease.
US CPI Preview: Forecasts from 10 major banks, price pressures to ease CME FedWatch Tool - CME Groupfurther (fxstreet.com)
