Week Ahead: CPI and FOMC

How rates and equities are likely to move into CPI and FOMC this week

This trading week is highly unique in that we have BOTH CPI and FOMC on the calendar. Why does this matter? Because the two most important events for interest rates are occurring within the same 48 hour period.

This matters for equities because, in an environment with elevated nominal growth, the stock-bond correlation is critical to monitor. There is a reason both of these are moving in lockstep right now:

As you know, I have been long ES

As we have rallied, we had a marginal pullback during NFP this past Friday. This technical pullback was met with aggressive buying thereby causing mean reversion. The implication of this is that we would need CPI to come in well above expectations OR Powell to significantly change his stance for a weekly close BELOW this NFP level (this is unlikely).

I laid out the interest rate situation in multiple articles already (link and link). Fundamentally, we are unlikely to move lower in ZT from here. There is an incredibly low probability we move BELOW 101’22 and have a weekly close under that level. The reason for this is that we were at that exact level when the market was pricing a “hawkish pivot.” It is highly unlikely that we bring hikes back on the table given the recent softening in growth.

One of the things I said last week is that we likely had the last chance to get long gold for a while. This view remains. We are likely to rally in gold through these catalysts this week.

I explained my views on FX here:

Everyone is focused on the last dot plot which is just completely misguided:

As of now, June and July cuts are off the table. Two cuts for the remainder of the year are very possible given the spread between Fed Funds and inflation. This will especially be true if core inflation comes out in line with expectations. The market isn’t pricing a high enough probability of a cut this year.

Conclusion:

I will be sharing the trades and specific analyses through these catalysts with paid subscribers. If you are new, this would probably be a great week to do a free trial. As always, keep a clear mind through events like this, and don’t listen to the noise.