Why the CPI Report Matters and Could be a Bullish Catalyst

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As long as inflationary expectations remained low after Jerome's last speech where he spoke about softening the increase in interest rates, which may or may not be the case, there is a good chance that inflation ticks down. This would confirm a 50bp hike for December, easing monetary policy and providing room for equities to continue their rally. While I think a lower CPI report is more likely in the near-term than a tick up in inflation, with a possible higher than 50bp increase and a decline in equites, it could go either way.

Later, when the lagging effects of QT are felt, I expect a further decline in the market as discussed in my previous thesis.

It is also possible that inflation stays near its current 7.7%, in which case there may not be too large of a response in equity markets tomorrow. The bigger the move in CPI, the bigger the move in equites. VIX is inching up in anticipation of this binary event.

I am linking this thesis with "long" because I believe the negative CPI trend will continue and result in a near-term rally, but this is only because I feel there is a higher probability of this occurring, not that it is by any means certain.

InTheMoney
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I would like to add that any significant increase in inflation will open up a large downside move because 50bps is pretty much priced in. A good drop in inflation means that future monetary policy restrictions will be less, or even stop sooner than expected, which will result in a rally. A small decrease in inflation may not see a lot of movement as it will remain in-line with the FOMC's 50bp cut and future interest rate trajectory.
Beyond Technical AnalysisCPIeconomyFundamental Analysisinflationjeromepowellpowellrates

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