CPI Report was a "Best Case Scenario" for Bulls

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This is an exclusive “Signal Report” from our new institutional-grade investment strategy offering, We Study Markets Pro.

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This sample signal report covers the February CPI (released today at 8:30 AM ET).

Let’s dive in 👇🏻

— The We Study Markets team

The most bullish thing stocks can do is rally on bad news. That is happening today.

When assessing markets, looking at incoming data and news relative to what is already priced in is crucial.

Wall Street has an adage: “Markets top on good news and bottom on bad news.”

When bad news fails to bring stocks down, that usually indicates that fuel is still left in the tank for a continued rally. And vice versa, when good news fails to send stocks higher… well, look out below

It is a simple but effective framework.

• Today’s CPI report was “hot” relative to consensus expectations

• But stocks rallied after the release

• Our guess is the plurality of consensus would have guessed this hot report would send stocks into a freefall

• Nope. Stocks gapped higher at the open and have continued rallying (as of mid-day Tues).

• As explained earlier, when “bad news” fails to bring stocks down, that is positive. It keeps us optimistic on the near-term outlook for equities.
  

Let’s dig into the actual release numbers.

• Core MoM: 0.36% MoM Actual vs 0.30% Est (slightly hot)

• Headline MoM: 0.44% MoM Actual vs 0.40% Est (slightly hot?)

• Core MoM is really the important figure to watch here as it strips out Food/Energy (volatile categories)

And when digging into the core figure, we are reminded of what’s really driving inflation.

• 83.5% of the rise in Core CPI YoY has been driven by two categories:

• Rent of shelter (65.9% of rise)

• Motor Vehicle Insurance (17.6% of rise)

• Woah…all of the Core inflation is in these two categories

But the outlook for disinflation in these two categories remains strong:

Historically, Motor Vehicle Insurance CPI YoY follows the Manheim Used Car Index YoY. But the two have diverged since January 2022.

• We think the BLS’s lagged data will catch up to the real-time Manheim proxy

• This supports deceleration in Motor Vehicle Insurance CPI

• This means the Fed has less work to do = good for stocks

And the same goes for rent of shelter. Take a look:

• Shelter CPI was 5.7% YoY

• But the NAHB Housing Index (which leads Shelter CPI YoY by 17 months) has been tanking over the past year

• It means Shelter CPI YoY could fall to sub 2% over the next 12 months

• This also means Fed has less work to do = good for stocks

Thus, the hot CPI release does not change our thesis: The outlook for stocks remains strong over the next 6-12 months. In fact, it supports the consensus that remains offside (given the lack of selling on the hot print).

That’s it in a nutshell. Tomorrow we will cover the sectors that benefit most when the Federal Reserve cuts interest rates. That client will be exclusive to We Study Markets Pro clients.

Enjoy the report?

Look Ahead

Our next We Study Markets Pro edition, exclusive to clients, is on Wednesday, March 13th.

See you next time!

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