Thanks to everyone who responded to our survey. Please hit us back with feedback or questions you’d like to see asked – our goal is to help, after all.
Quick summary, respondents:
- Are about evenly split on whether core CPI will be higher or lower than consensus tomorrow (38% above, 26% lower, 35% in-line).
- Think a higher-than-consensus CPI reading will cause a risk-off move, a lower-than-consensus reading to be risk-on, and in-line negligible/mixed or risk-on.
- Think core PCE falling to 3.25% by the end of 2023 and the fed funds rate peaking at ~4.5-4.7% would be risk-on.
- Expect 3Q earnings to be a risk-off catalyst, though more investors are positive about it than is suspected.
CPI: Estimates of core CPI tomorrow are split between higher, lower, and in-line. No one knows…
…But everyone agrees on the market reaction. Respondents think a higher-than-consensus reading will be risk-off, a lower-than-consensus reading will be risk-on, and an in-line reading will cause a negligible/mixed market reaction or risk-on.
Since no one has a good idea about CPI, the move likely hasn’t been front run. A few months back, before Jackson Hole, investors we polled had a consensus view that Jackson Hole would not be risk-off. The market worked higher all week before falling over -3% after Powell’s short, hawkish speech. CPI presents a risk, but the vol works both ways, unlike before Jackson Hole.
Hypothetical PCE and FF Path: The majority of investors think core PCE falling to 3.25% by the end of 2023 and the fed funds rate peaking at ~4.5-4.7% would be risk-on for equities. Only 15% expect a risk-off reaction. 3.25% is Gerard’s middle-up inflation simulation (more HERE), which is not an overly optimistic take. It includes his work on stubbornly high rent inflation. 4.5%-4.7% is the current market pricing for the fed funds rate at the end of 2023, and also matches the Fed’s SEP. Investors are anticipating a pessimistic outcome for inflation and an aggressive Fed in response. Respondents told us the more benign, but not optimistic scenario would be risk-on.
3Q Earnings: The majority of investors also expect 3Q earnings will be a negative catalyst for equities. However, more think negligible or risk-on than people expect, even if it’s not many (30% and 18%, respectively).
As we mentioned in a Quant earnings primer (HERE), company and analyst sales and earnings guidance is terrible. Both are confirming the plunge in Earnings Sentiment that started in late-2021. On the one hand, that adds to the low bar earnings need to clear this season. On the other hand, fundamentals, which have been a support for equities all year, are starting to deteriorate. Less tight financial conditions are necessary for the market to absorb weaker fundamentals longer term.
