I'd like to kick off this analysis by saying these are two potential outcomes of SPY's future price action given that market fundamentals stay largely unchanged before and after the CPI release next Wednesday, i.e., no escalation in Taiwan and no wild earnings surprises before and directly after the read (yes, I know that is a lot to assume). The expected paths I have for SPY should not be taken as an exact estimate as they are relatively rough sketches of what I believe may occur.
Path 1 (Green Path): CPI comes out lower than expected. Anything less than 8.9% and markets will likely respond positively to the news, due to the idea that headline inflation has peaked. SPY will likely rally past its current zone of resistance at the 416 area and rip up to the trend resistance around the 430 area. From there I would expect a pause in bullish momentum and at least a few weeks of sideways trading.
Path 2 (Red Path): CPI comes out hot again, anything north of 9.1% would likely be enough to trigger this move down. The short-term bullish momentum will dissipate, as SPY tanks down toward the previous support area around 387. From there I expect either a long spurt of sideways trading or a resurgence of bearish control in markets leading the SPY down to the critical 350 support zone.
What path is more likely?
Despite my bearish outlook on markets, I do not think we will see a strong CPI print for July. I would assume CPI/headline inflation will come out weaker than consensus estimates, likely in the 8.2-8.5% range. My reasoning for this prediction comes from the sharp decrease in commodity prices across the board but most notably in food and energy prices (with exception of nat gas), all of which took place in the month of July. With that said I would say Path 1 is probably the more likely of the two outcomes.
Warning: Although I expect CPI to fall, I expect the core inflation rate to come out above consensus estimates. This to me- and others - will signal that inflation is becoming more embedded into the US economy. The sky-high added jobs number for July provides solid evidence that core inflation is sticky and not going anywhere anytime soon. Core inflation coming out hot will likely put a damper on any good news markets receive from a lower-than-expected CPI. With that in mind, perhaps we see neither path 1 nor path 2 play out. We may see a choppy couple of weeks of trading as markets try to digest the meaning of two very contradictory inflation prints.
As always this is not financial advice. Good luck!
Path 1 (Green Path): CPI comes out lower than expected. Anything less than 8.9% and markets will likely respond positively to the news, due to the idea that headline inflation has peaked. SPY will likely rally past its current zone of resistance at the 416 area and rip up to the trend resistance around the 430 area. From there I would expect a pause in bullish momentum and at least a few weeks of sideways trading.
Path 2 (Red Path): CPI comes out hot again, anything north of 9.1% would likely be enough to trigger this move down. The short-term bullish momentum will dissipate, as SPY tanks down toward the previous support area around 387. From there I expect either a long spurt of sideways trading or a resurgence of bearish control in markets leading the SPY down to the critical 350 support zone.
What path is more likely?
Despite my bearish outlook on markets, I do not think we will see a strong CPI print for July. I would assume CPI/headline inflation will come out weaker than consensus estimates, likely in the 8.2-8.5% range. My reasoning for this prediction comes from the sharp decrease in commodity prices across the board but most notably in food and energy prices (with exception of nat gas), all of which took place in the month of July. With that said I would say Path 1 is probably the more likely of the two outcomes.
Warning: Although I expect CPI to fall, I expect the core inflation rate to come out above consensus estimates. This to me- and others - will signal that inflation is becoming more embedded into the US economy. The sky-high added jobs number for July provides solid evidence that core inflation is sticky and not going anywhere anytime soon. Core inflation coming out hot will likely put a damper on any good news markets receive from a lower-than-expected CPI. With that in mind, perhaps we see neither path 1 nor path 2 play out. We may see a choppy couple of weeks of trading as markets try to digest the meaning of two very contradictory inflation prints.
As always this is not financial advice. Good luck!
