CPI at 4.2%, Third Straight Rise — So Why Did Markets Exhale?

TL;DR US CPI rose for a third straight month to 4.2%. The return higher — from as low as 2.3% a year ago — is genuinely concerning, but the key is that it came in line with expectations. Markets had braced for a worse print and exhaled with a modest bounce.

What happened: inflation is rising again

Today's CPI report put US year-over-year inflation at 4.2%, the third consecutive monthly rise. It came in line with expectations.

A year ago at this time, inflation looked like it was back near the Fed's targets. It went as low as 2.3% — and has basically never seen that number again. Now it's back on the rise. From an overall standpoint, it's concerning to still see inflation climbing.

The number: 4.2%, in line

On the surface, 4.2% is higher inflation. But markets trade on expectations versus reality, not absolute numbers.

This morning the market was positioned for CPI to be a more painful print than it actually was. When it merely matched expectations, everyone basically went: "Okay, inflation's rising — we already knew that, but it didn't rise significantly more than expected." In response, the market repriced a little, and precious metals caught a small bounce. Nothing too crazy.

Context: what changed from a month ago

Here's the nuanced but important difference. Last print, CPI spiked higher than expected. This time, inflation spiked in line with expectations. Same 'rise,' very different market reaction.

That's why, when I look at the asset scorecard for the S&P, the fundamentals actually lean slightly positive. Inflation isn't in a great spot, but today it was at least improving in direction. Economic growth looks fairly strong on PMIs, and jobs data has come in better than expected. On macro alone, it's not a terrible picture for stocks.

The variable you can't ignore is the Middle East. The longer that conflict drags on, the more obvious the inflation challenge becomes. Today's note out of the White House struck a hard tone — markets initially disliked it and moved lower broadly, then bounced a bit on the inflation number.

What to watch: PPI tomorrow

To be clear on my own positioning: I hold no gold shorts — only silver. Gold is still a strong downtrend that could see a reasonable bounce, but I'm not interested in going long it.

Tomorrow brings Producer Price Index (PPI) data. I expect volatility to stay high over the next three days. One in-line CPI print soothing the market doesn't mean the trend has broken — the direction of three consecutive rises matters more.

FAQ

Q: If CPI matched expectations, why does it matter? A: Markets move on whether data is worse or better than expected. Last time it ran hot and shocked the market; this time it matched and got digested as a 'known' negative. Same rise, very different shock value.

Q: What's driving inflation higher again? A: The prolonged Middle East conflict is a major factor. The longer it lasts, the more it pressures oil and inflation, which feeds volatility in the dollar and precious metals.

Q: Is the current macro bad for stocks? A: Less than you'd think. Inflation isn't in a good spot, but it improved in direction today, and growth and jobs are running better than expected. The caveats are challenged technicals and elevated volatility.