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Everyone's got their hot takes on the US CPI number and what it will mean for markets. Here's another (better) way to think of it 👇
Via Morgan Stanley's Iliana Bouzali 👇
"You can't prove (a) hard landing right now... but it might be easier to prove falling inflation"
There's a massive disconnect between where we are right now and where 'everyone' thinks (and history suggests) we're heading.
But you can't get to a hard landing without first passing though the 'soft landing' phase. Or maybe neither of those apply. Aircraft analogies are tricky.
Imagine yourself sat on a plane. Doesn't matter if you're uncomfortable on a Ryanair flight with your knees up round your ears or living it up in first class luxury.
Just imagine yourself in that big metal tube 30,000 feet in the air...
Suddenly, the plane starts plummeting towards the ground. Everyone's screaming, your life flashes before your eyes, call your family, say your goodbyes, it's over. That's a crash landing. (Like March 2020)
There's only one bet to make in that scenario. Back the pilot to pull off a last minute miracle and regain control of the plane before it 'lands'.
The plane might not pick up speed any time soon, but death is avoided (and betting on the end of the world is negative EV in any case).
So that's one scenario. Then you've got your soft or hard landings.
Which is where the analogy falls apart. Because nobody really wants to 'land' an economy. It's supposed to remain in perpetual motion, more like the common swift (airborne 99.5% of a 10 month migration, insane!) than a passenger plane.
So, we don't actually want to land, we just want to stay in this Goldilocks zone for as long as possible.
At some point later in the year, we'll probably trade the hard-landing fears (the overshoot). However, all that matters right now is the dominant theme.
It's often said that markets can only focus on one thing at a time, and inflation is that theme right now. Back to Iliana and...
The better way to think about it
"This is not an email to forecast the exact CPI but rather to say, in the short term, it is easier to trade inflation falling than it is to trade growth falling"
"Inflation expectations are coming down faster than growth expectations. This sequencing matters for risk. The market got giddy on signs that inflation is moderating - over the last 12 months the SPX has rallied 2.8% on average on CPI misses versus sold off 1.3% on CPI beats."
So are we supposed to buy the market here? No...
A low CPI might lull people into a lazy long. But I think to a large extent it's been pre-traded.
We can agree on that...
More importantly, as Mike Wilson pointed out, the recent CPI prints trapped people in bad trades. In October you got your face ripped off on a higher CPI and in December you got smoked on a weaker number.
Couldn't agree more with the above. More detail here 👇
There's so much nuance to the inflation data too. Is the service sector still strong? What about core services ex shelter? Is the recent 'Goldilocks' jobs report a sign of things to come? More workers return to the labour force sees wage pressures declining, but a resilient economy continues to grow and keeps hiring?
That last one doesn't seem like the best bet...
For now, it's all about inflation and wages. Another soft print today could see a continued risk rally. But how much is already in the price?
My read is that we're not done with this Goldilocks theme just yet, but who really knows? Volatility around the event is assured. Beyond that, anything can happen, and it probably will.