The Most Important Number of the Year: Tomorrows's CPI Reading

Without being hyperbolic, I think tomorrow's CPI reading will be the most important number of the year in hindsight.

Let's go over the facts, and figure out what to expect tomorrow:

First of all, we need to remember that CPI lags behind by a month. For example, tomorrow's CPI data is going to be on November numbers, and last month's surprise CPI beat was actually from October data.

Why did I mention this first? It's important to remember this because the data that we normally look at is current, so we can't necessarily include that in our estimates of CPI. For example, gas prices returned to the same price as they were a year ago last week, but that won't be included in the numbers tomorrow (since that occurred in December, not November).

To be clear, though, gas prices were falling in November too. It's just an illustration to remember which metrics you want to factor into your CPI prediction.

To recap last month's CPI data, the October CPI increased by 0.4% MoM and 7.7% YoY, both of which were under expectations. To conclude my newsletter at the time, I said that it was too early to act on that data because it didn't confirm a trend.

As you can see from the chart above, there were a few false positives where CPI dipped but went right back up. If you started loading up on stocks at any of those false positives you wouldn't be too happy right now.

So what can we expect from the data tomorrow?

Core CPI (CPI excluding food and energy) expectations include a 0.3% MoM bump and a 6.1% YoY increase. For headline inflation, expectations are for a 7.3% YoY change.

I can't say for sure where CPI will land, but based on this past year, I can say that it probably won't be close to the estimates. Here's a fun chart from Bloomberg that shows just how wrong the previous estimates have been.

While most of the previous CPI readings have surprised to the upside, hopefully this one can surprise to the downside.

Here's how I see tomorrow playing out:

If CPI comes in below 7.4%, the markets will be happy. Everyone will say the Fed is succeeding, and that a 50bps hike is warranted.

If CPI comes in between 7.4% and 7.7% (the previous CPI reading), the markets will be more nervous. Some talking heads might even suggest that the Fed should do a 75bps hike. Rates will probably rise a bit and stocks might stay flat or go down slightly.

If CPI comes in above 7.7% markets will tank. This will break the declining CPI trend, and markets will be thrown into despair. I don't think this will happen (or maybe I just really hope it doesn't).

And finally, the case we're all hoping for: CPI comes below 7.4%. If this happens, the markets will have a field day. I would anticipate that rates would come down as well (Not as dramatically as they did last time though).

According to mortgagenewsdaily.com, the current average 30 year mortgage is hovering around 6.4%. If rates tank, we could potentially see the average 30 year rate back in the 5s.

If that happens, I think we could see a major stabilization in the housing market. In addition, I wrote about how it's entirely possible for mortgage rates to go down even as the Fed funds rate increases. I wrote about the logic briefly in the last section of my newsletter here.

If we see mortgage rates come down to the mid 5s next year, we might see a complete halting in falling home prices.

We can talk about that later though; for now, we just need to make it through tomorrow's CPI data.

I'll make sure to write a post with some analysis after the numbers come out tomorrow morning.

That's all for this week!