How Best To Trade The CPI Data?

Following the conclusion of the Apple Wonderlust event, the market’s attention is shifting to Wednesday morning, when Consumer Price Index (CPI) inflation data will be released.

⚠️ Trading tips: looking at calls above 446.5 and puts below 444.5 after CPI data releases. Another day of big move coming up after days of consolidation expected. Not financial advice 😉

Some room for the upside? 🤔

The Bad News

According to the forecasts, this forthcoming inflation report is expected to diverge significantly from recent ones, raising concerns that have been dormant for over a year.

Economists are anticipating a substantial year-on-year surge in the overall CPI index for August, projecting a rate of 3.6%, a notable increase from the 3.2% recorded in July.

More worrisome is the estimated monthly price pressure, which could climb to 0.6%, a substantial rise compared to the modest 0.2% observed in July. If this prediction holds true, it would mark the most significant monthly increase since June 2022.

A spike in energy prices is to blame for the expected rise in the overall inflation rate for August.

On a positive note, the core inflation rate, excluding energy and food components, is forecast to decrease from July’s 4.7% year-on-year to 4.3% in August. On a monthly basis, core inflation is expected to maintain a steady 0.2% pace, mirroring July’s figures.

Bad is good again? 😅

The Impact

Over the last decade, there have been just 11 instances of monthly CPI readings hitting or surpassing the 0.6% threshold.

These inflationary episodes occurred between April and June 2021, from October 2021 to March 2022 and again in May and June 2022.

Notably, June 2022 marked the pinnacle of the post-pandemic inflationary surge, with the CPI surging at an extraordinary month-on-month rate of 1.2%. The CPI report for June 2022 was disclosed on July 13, 2022, and it had significant effects on major asset classes, leading to the following daily changes:

SPDR S&P 500 ETF Trust (NYSE:SPX) down 0.5%

Invesco QQQ Trust (NASDAQ:QQQ) down 0.2%

Dow Jones Industrial Average ETF (NYSE:DIA) down 0.7%

SPDR Gold Trust (NYSE:GLD) up 0.5%

US Dollar Index (DXY) down 0.1%

iShares 20+ Year Treasury Bond ETF (NYSE:TLT) up 1.2%

The May 2022 CPI report, unveiled on June 10, 2022, displaying a monthly inflation rate of 0.9%, triggered even more pronounced responses: the S&P 500 plummeted by 2.9%, the Nasdaq 100 experienced a sharp 3.6% decline and the U.S. dollar surged by 0.9%.

Data dependent for FOMC

The Good News

Fund Strat on Monday made a bold call for gains this week. “We believe weakness in September was front-loaded. So we see higher probabilities of gains this week,” the firm said in its weekly commentary

“The market has again become a "game of inches" where investors need to be tactically mindful,” the firm’s Head of Research Tom Lee said.

“Our constructive stance on markets remains intact,” he said, basing his view on its expectation of inflation cooling by more than the consensus estimates and the Fed likely shifting away from “data dependency” toward looking at more forward measures.

“But we still see equity markets higher by year-end and once we are through this continued chop, we see S&P 500 rising to 4,750 or greater by year-end,” Lee added.

Buy put

Buy call

Leading up to the critical data release, market sentiment suggests a 93% probability, as indicated by Fed Futures, that the Federal Reserve will maintain unchanged interest rates during the upcoming Federal Open Market Committee Meeting.

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