Trump, Powell, and US CPI: Can Stocks Survive This?

Macro Money - Market Analysis & Inflation Data (February 6, 2024)

Key Concepts:

• CPI (Consumer Price Index): A measure of the average change over time in the prices paid by urban consumers for a basket of consumer goods and services.
• Core CPI: CPI excluding food and energy prices, providing a clearer picture of underlying inflation trends.
• Federal Reserve (The Fed): The central banking system of the United States, responsible for monetary policy.
• Nowcast: A real-time economic forecast, often used to predict CPI data before its official release. (Specifically, the Cleveland Fed Nowcast)
• Term Premium: The extra return investors demand for holding longer-term bonds, reflecting uncertainty about future interest rates and inflation.
• Goldilocks Scenario: An economic condition characterized by stable growth and low inflation, considered ideal for markets.
• Basis Points (bps): A unit of measurement used in finance to describe the percentage change in an interest rate or yield (1 bps = 0.01%).
• ISM (Institute for Supply Management): Reports on economic activity in the manufacturing and service sectors.
• Trade Policy Uncertainty Index: A measure of uncertainty surrounding international trade policies.

I. Market Reaction to Initial News & Inflation Expectations

The trading day began with markets reacting to anticipation of US inflation data and a contentious statement from the Federal Reserve Chair following a subpoena from the Justice Department regarding cost overruns in Fed building renovations. Initial price action showed stock markets down (S&P down 0.79% at one point, NASDAQ and Russell also lower) but rebounding to close fractionally higher. Gold prices spiked almost 2%, reaching a new record high, while the dollar experienced a slight pullback and bonds oscillated within familiar ranges. This initial response wasn’t “pandemonium,” suggesting a wait-and-see approach before the CPI data release.

II. CPI Data Preview & Forecasts

The expectation is for both headline and core CPI to remain at 2.7%. This would be relatively encouraging, as November saw a similar low (4-month low for headline), and 2.6% (the core) was the lowest since March 2021. The Fed views this as progress towards its inflation goals. The Cleveland Fed Nowcast suggests a steep disinflationary trend for both headline (down to 2.6% in December, 2.2% in January) and core (down to 2.4% in January). This forecast aligns with the Fed’s expectation that the rebasing of tariffs (removed from calculations by April) will contribute to lower CPI numbers, potentially creating a “Goldilocks” scenario. The Fed’s short-term capital injections, expected to continue past mid-April, and market expectations for the first rate cut in April, further support this optimistic outlook.

III. Data Quality Concerns & Potential Upside Risk

Despite the encouraging forecasts, concerns exist regarding the quality of the CPI data. The October report was delayed due to the government shutdown, and November’s report showed the largest deviation between the Nowcast and actual results since the COVID lockdowns (core CPI was particularly off course). While goods inflation appears to be plateauing due to the anticipated tariff roll-off, and service sector inflation is easing, an upside surprise remains possible. This is particularly concerning because the service sector is the largest component of CPI.

IV. Fed Policy Divergence & Market Positioning

A significant divergence exists between the Fed’s and the market’s expectations for rate cuts. The Fed projects only one rate cut in 2024 (a view held since June 2023), while markets are pricing in approximately 50 basis points (two rate cuts). This discrepancy has contributed to choppy trading in stocks, which have struggled to make consistent upward progress. A hotter-than-expected CPI number would likely reinforce the Fed’s hawkish stance, potentially leading to further market disappointment.

V. Political Interference & Fed Credibility

The recent clash between the President and Fed Chair Powell adds another layer of complexity. Powell described the accusations of cost overruns as a “pretext” and asserted that the Fed’s interest rate decisions are based on economic assessment, not presidential preferences. A hot CPI number would put the Fed’s credibility on the line, making rate cuts unlikely in the near term and potentially escalating the political tension. Conversely, a soft CPI number could de-escalate the situation and potentially pave the way for an earlier rate cut.

VI. Economic Resilience & Global Trade

Despite inflation concerns, the US economy has demonstrated resilience. The ISM report showed strong growth in the service sector, and the Q3 GDP report indicated a rebound in consumption. Even a pessimistic S&P Global PMI report suggested a manageable slowdown in Q4. However, a decline in global trade volume (the largest since the 2008-2009 financial crisis) is a concern, particularly given the global integration of supply chains supporting the AI boom.

VII. Market Sentiment & Positioning

Despite the upbeat economic data, market participants are pricing in a significant amount of uncertainty, reflected in the elevated term premium in US Treasury bonds. This suggests a desire for insurance against potential volatility. The speaker’s current positioning is:

• Long Gold: Benefiting from uncertainty.
• Long US Dollar: Holding up reasonably well despite recent weakness.
• Short Risk: Expecting vulnerability in the stock market (short S&P, NASDAQ, and Bitcoin). A long position in Russell was considered but rejected due to unfavorable risk-reward.
• Long Oil (Call Verticals): Anticipating potential geopolitical disruptions to China’s oil supply.

VIII. Notable Quotes

• Jerome Powell (Federal Reserve Chair): “This threat [subpoena] is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public rather than following the preferences of the president.”

IX. Synthesis & Conclusion

The upcoming CPI data release is pivotal. A soft number could diffuse the political tension and potentially accelerate rate cuts, boosting market sentiment. However, data quality concerns and economic resilience suggest a potential for an upside surprise. A hot CPI number would reinforce the Fed’s hawkish stance, escalate political conflict, and likely pressure stock markets. The speaker’s positioning reflects a cautious outlook, favoring gold, the dollar, and a short risk stance, while acknowledging potential opportunities in oil. The overall situation is characterized by significant uncertainty and a divergence between the Fed’s and the market’s expectations, making the CPI data release a critical event for the coming weeks.