Trading CPI Data and Cashing In
If the bulls get what they want, inflation will continue to cool and clear the way.
You can trade the immediate moves around the CPI data release, or you can let that action settle out and then make your moves.
Or you can do both!
If the data comes in hot with inflation ticking up higher, markets could get a bit of a scare. This is because of the relationship between inflation, rates, and the markets.
If inflation starts moving back up it will be a sign that inflation has not yet been defeated. The Fed would not welcome this news and markets know it.
If inflation is persistent, rates will not get cut any time soon which is bad news for markets because they have largely priced in rate cuts for this year.
If CPI data becomes a real problem, rate hikes will be put back on the table.
I do not think we are anywhere near that scenario, but it is one that is possibly the least welcome by the FOMC.
If CPI data comes in cool and inflation continues to drop, markets might continue their incredible move higher. The likelihood of rate cuts will appear to have gone up which has a lot of implications.
Lower rates mean less expensive financing for businesses. These lower borrowing costs are bullish and really help growth sectors like biotech and technology.
Any business that needs to refinance debt will be able to do so with lower costs if rates are cut.
If the inflation data is “in line” and does not cool off, it could be seen as a negative. Again, because markets are pricing in rate cuts, a moderate CPI print could indicate fewer or later rate cuts and would be bearish.
Taking a slightly different look at what the data will mean, consider stocks known for paying solid dividends.
If rates drop, these companies will look more attractive because of the income they can provide in addition to their potential for growth.
When rates move higher these stocks are less attractive because you can get an interest yield that is competitive without taking the risk of owning stocks.
I like the communications sector for this very reason. I expect rate cuts to come, sooner or later, which should benefit an already on fire communications sector.
Also pay attention to the volatility index, VIX.
Keep in mind that we are getting information with the CPI data. This means that something that was uncertain, the data, is now certain.
Certainty can and does deflate volatility.
When we get the inflation data the market will have this knowledge and will react accordingly, and with more certainty.
If volatility drops, typically markets find a way to move higher.
There are a myriad of factors to consider when trading economic data. It is anything but straightforward.
If you are into taking high risk, high reward trades, you might get the action you are looking for. Day trading around this information can be incredibly profitable.
Ultimately, it is also extremely high risk. So you will find me mostly on the sidelines, waiting for the reaction to the information.
Trade ideas will start rolling out in force shortly after.
Take your time and find the right set up before you dive in.
Have a great day!
-Nate
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