Clueless Investors, Decisive Positioning

Thoughts on the Market

Things are about to pick up.

Tomorrow’s June CPI report kicks things off, followed by the big banks officially opening Q2 earnings season.

If inflation comes in softer-than-expected, the market can finally shift its focus toward earnings and what corporate America has to say about the economy. But if inflation surprises to the upside, expect the market to stay on shaky ground — at least until the next FOMC meeting in two weeks.

For now though, the technical backdrop still remains constructive. The S&P 500 continues to consolidate above a key relative level against low-volatility stocks, suggesting the path of least resistance is still higher until proven otherwise.

Looking ahead to tomorrow’s CPI report, the Street expects headline inflation to fall -0.1% month-over-month — hardly surprising given the recent drop in energy prices. The more important number, though, is core CPI. Consensus is still looking for a relatively hot +0.2% monthly increase, meaning a softer-than-expected core print is what would really move the needle and reinforce the disinflation story.

That remains our base case. We continue to think inflation will keep surprising to the downside over the coming months, which should eventually force rate markets to unwind their expectations for further Fed hikes.

Our next chart highlights the disconnect. Truflation’s real-time inflation proxy rolled over almost exactly when markets started pricing in more hikes. And since mid-May, that has created a massive divergence between real-time inflation and rate expectations — one that’s unlikely to last.

To us, one of those has to give. And we continue to think it’ll be rate expectations — not inflation — because the market’s hawkish repricing never really lined up with what the real-time inflation data was already telling us.

Put differently, markets turned the most hawkish right as the latest inflation impulse was already rolling over.

It’s a setup that reminds us a lot of September 2024. Back then, the Fed shifted to its most dovish stance and began cutting rates even though real-time inflation had already started moving higher months earlier, as shown below.