Stock traders are angling in on how to trade the CPI report, while longer-term investors are adjusting price targets on where to buy back into equities. Factors include what the central bank will make of the figures, and whether sentiment will turn in favor of a soft or hard landing for the economy. Under the microscope are also sub-sectors of the CPI report, including shelter costs and medical care, though analysts still hold very different pictures on where the market is headed.
"We believe analyst bias and an asymmetric payoff structure is building a consensus that will be difficult to exceed," wrote Wells Fargo's Chris Harvey. "Supporting our view that the market likely will embrace a 'peak-inflation' view is the trend in breakevens (across maturities) falling significantly since June 10, with 2yr breakevens tightening over 100bps. Notably, 5yr and 10yr breakevens are back to levels observed a year ago. Commodity prices have also been trending down, with crude oil off $12 (10%) since June 10."
"The investors we speak to are generally well-hedged, expecting economic conditions to deteriorate further,” wrote Anand Omprakash, head of derivatives and quantitative strategy at Elevation Securities. Many are concerned that Fed's recent aggressive actions could tip the economy into a full-scale recession, while a surging dollar could weigh on corporate earnings. "The days of 'buy the dip,' I think, are largely behind us," declared Neil Desai, portfolio manager at Putnam Investments. "We're definitely more cautious."
How is the CPI calculated?
The measure uses a "basket of goods" approach that aims to compare costs of various consumer goods and services. These can include transportation, food, haircuts, rent, tuition and clothes (80,000 items are included in the report). Each month, data collectors from the Bureau of Labor Statistics call, visit, or check the websites of thousands of retail stores, professional offices and other establishments to assess nationwide price information. Specialists then examine the data for accuracy and make statistical adjustments based on any given item's value.
