Risks Skewed Towards a Market Wobble on US CPI: 3-Minute MLIV

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00:00We're all going to be focused on this. I haven't had data for ages. What is it going to tell us?

00:04Yeah, I mean, this is the hard bit, right? We have inflation data coming in. I think the feed

00:09through to the equity market, the main channel is how it impacts your expectation for Fed funds.

00:14So what you tend to see is if you get a hotter than expected inflation print,

00:18that means you need a higher discount rate that impacts earnings and therefore equities to the

00:22downside. Whereas if you get a downside surprise, you get the opposite impact. Now, the bad news is

00:28I think there's much higher bar to price in more dovishness for the Fed than more hawkishness. So

00:32you have a terminal rate currently priced that's 3 percent. That's in line with dots. That's

00:38essentially where the Fed sees neutral at. So to go more lower than that or more dovish than that,

00:44you have to say essentially you're entering recession territory, which seems unlikely,

00:47but also isn't great for stocks. Whereas you have an ability to price in more hawkishness.

00:53What I would say, though, in terms of good news is that the expectation is quite high.

00:57So implicit in that is this idea that the market assumes the Fed is putting more priority on the

01:04labour market rather than inflation. So if you do get a hot print, you might just see a wobble in

01:09equity markets rather than something bigger, especially given that you won't have the Fed

01:13coming out during their blackout period. You won't have any kind of hawkish commentary

01:16to go with that hotter print.

01:19I was on WEI, not WEIF. Just going to point out the futures are up a little less than I said.

01:24Four tenths of one on that side.

01:27You're talking about the equities market. Talk to us a little about the bond market here.

01:30I'm looking at $3.99 on the 10-year. It's kind of been in like a weird five basis point range,

01:34I want to say, all week long. Does this print change that?

01:38I think it's really hard for this print to change it because there's so much emphasis being put on the

01:43growth story, on the labour market, because there's this idea that inflation, if it's tariff-driven,

01:48might be transitory, which seems like a big mistake given that we've had this transitory

01:52inflation story before. I will say you've got a little bit of a feed-through in terms of higher

01:57oil prices, higher break-evens. I do think at some point either you need to price a higher Fed

02:01funds, which pushes up your real yield in terms of terminal, or you need to admit that you're not

02:07going to get back to 2% inflation anytime soon, which means your break-even rises.

02:11So I think certainly you need to see higher yields as inflation comes in hotter. I just

02:15don't necessarily think that comes today or even really in the near future until we get

02:20some kind of sign that inflation isn't just going transitory. It's actually having longer-term impacts.

02:28Skylar, it's a big week next week. There's a lot of weekend risk with these U.S.-China discussions.

02:32Do you think there's a risk you could just see profit-taking after this report, regardless of what it is?

02:36Yeah. I mean, this is the thing with valuations, is by themselves,

02:40they don't predict your equity returns whatsoever, but what they do do is they make investors more

02:45nervous. So what you tend to see is when equity valuations are elevated, they stay elevated for

02:51long periods of time as earnings come in strongly in an expansionary period. But when you do get a

02:57sell-off, the sell-off tends to be harder. So I think it's a reason rather for vigilance instead of

03:02selling off altogether. And it's something certainly you need to pay attention to, is that negative catalyst.

03:06So