Leading up to the release of the June Consumer Price Index (CPI) today, there was no fear in the market of what it might see in that report. How do we know? The answer is in the price action.<\/p>\n\n\n\n
Before today’s release, the yield on the 2-yr note was down nine basis points for the week, the yield on the inflation-sensitive 10-yr note was down 10 basis points, the U.S. Dollar Index was down 0.8% to 101.50, the Russell 2000 was up 2.6%, and the Invesco S&P 500 Equal-Weight ETF (RSP) was up 2.0%.<\/p>\n\n\n\n
Granted the trading volume behind the gains in the equity market wasn’t all that heavy; nonetheless, stocks can go down big on light volume, too, yet the default disposition among market participants was to push stocks higher.<\/p>\n\n\n\n
The lighter volume suggested there was some hesitancy before the June CPI release, but to reiterate, the prevailing price action did not suggest there was any fear. Rather, there was optimism that the June CPI report would produce a friendly inflation reading that, in turn, would temper rate-hike expectations.<\/p>\n\n\n\n
That optimism, it turns out, was well founded.<\/p>\n\n\n\n
Total CPI for June was up 0.2% month-over-month (Briefing.com consensus 0.3%) with the index for shelter accounting for 70% of the increase. Core CPI, which excludes food and energy, was also up 0.2% month-over-month (Briefing.com consensus 0.3%), which was the smallest month-over-month change since August 2021.<\/p>\n\n\n\n
On a year-over-year basis, total CPI decelerated to 3.0% from 4.0% in May, marking its smallest increase since March 2021, while core CPI decelerated to 4.8% from 5.3% in May.<\/p>\n\n\n\n
The key takeaway from the report is that there is clear evidence of encouraging disinflation for both total and core CPI that should temper worries about the Fed raising rates again beyond its July FOMC meeting.<\/p>\n\n\n\n
The markets look to be appreciating that idea. The 2-yr note yield, at 4.84% just before the 8:30 a.m. ET release, is at 4.75%, down 14 basis points from yesterday’s settlement. The 10-yr note yield, at 3.95% just before the release, is at 3.90%, down eight basis points from yesterday’s settlement.<\/p>\n\n\n\n
According to the CME Fed Watch Tool, there is a 91.1% probability of a 25-basis points rate hike at the July meeting (versus 92.4% in front of the CPI report), whereas the probability of a second rate hike at either the September, November, or December FOMC meetings is just 12.8%, 28.3%, and 23.9%, respectively, versus 18.5%, 36.4%, and 32.8% in front of the report.<\/p>\n\n\n\n
The drop in market rates and rate-hike expectations simultaneously flowed through to the equity futures market, which spiked following the CPI report.<\/p>\n\n\n\n
Currently, the S&P 500 futures are up 28 points and are trading 0.7% above fair value, the Nasdaq 100 futures are up 129 points and are trading 0.9% above fair value, and the Dow Jones Industrial Average futures are up 160 points and are trading 0.5% above fair value.<\/p>\n\n\n\n
Recall that Fundstrat’s Tom Lee said on Monday that he thought the S&P 500 could add as many as 100 points in the near term if core CPI was 0.2% or less, as that friendly reading would drive a rally in the 2-yr note that, in turn, would drive a rally in stocks predicated on the thinking that the Fed is succeeding in its inflation fight.<\/p>\n\n\n\n
Mr. Lee’s view should resonate on trading floors — certainly at today’s open, which won’t reflect any disruptive fear of inflation but might reflect a fear of missing out on further gains.<\/p>\n\n\n\n
—<\/p>\n\n\n\n