All eyes are on the arrival of US Inflation data this week.
The market expectation is 6.5%.
My own view is 6.8%. Does it matter? Perhaps.
Market participants are largely already positioned for an improvement in the inflation number.
The previous was 7.1%. The degree of the drop from that alarming, to a still alarming, but lower number, will largely determine the degree of immediate response in market pricing. This instantaneous re-pricing will occur across all global financial markets. Such is the understandably real, but also story telling sentiment build up to this one single data release.
When we consider all such data as a mere survey, an approximation, or some indication, this is all quite remarkable. People seem to have simplified life to one single data release at a time. Is it up or down on this number? That is how we will trade the relevant market on the day. In this case every market.
We should always be seeking to determine the overall shift occurring in the economy for a guide on what should be reasonable pricing in the future of relevant markets.
Markets seem to have lost that nuanced approach, however. Having miraculously determined that the inflation number will force a Fed response and that that response will determine the economy, and therefore earnings, and finally stock prices. It is a very long chain in fact, and one of the highly inaccurate and complex sub-relationships. But there you have it. Keeping it simple and binary is the nature of the world today.
The financial markets of today, like life in general, take an approach of it is all too hard so let’s come up with a simple rule that we all will follow.
Extremely high inflation, but less so, is apparently a reason to aggressively buy stocks.
The world expects and will get a lower inflation number that sees an instant re-pricing higher of stocks. Similarly other markets.
How long could that higher pricing last anywhere from a snowflake in a desert to hibernating bear?
6.8% to 6.5% is bullish for the herd.
6.4% to 6.2% is nothing short of SpaceX moonshot stuff.
6.8% is more of a stunned deer in headlights.
6.9%+ would generate absolute panic and free-fall.
The actual number is most probably in the 6.4% to 6.8% range. Which provides a range of bullish responses from fantastic to slight. This is where the value add is. At 6.7%, and 6.8%, the rally may not last much longer than a few minutes to a few hours. An even lower inflation outcome means a further rally of 1-3 days.
6.9% and markets begin to fall. 7.0%, they crash.
Market insights and analysis from Clifford Bennett, Chief Economist at ACY Securities
