CPI JAN 2023

The market is expecting deflation. The chart below indicates that the median prediction for December month-over-month CPI is -0.1% (the high estimate is +.3%.).    Bianco makes the case that deflation is therefore already priced in.

The chart below shows that year-over-year core inflation is expected to fall from 6.0% to 5.7%. As we know, core inflation is the most important number for the Federal Reserve.

Bianco goes on to say that the market “wants to believe" that -0.1% will be a stunner and causing the Fed to “only” hike 25 basis points on February 1st. He also rightly points out that these expectations are “priced into” the ongoing rally and must “be beaten” with even lower numbers for the market to rally further.   It’s ridiculous that our markets have become completely and utterly beholden to a few data points. Unfortunately, the Federal Reserve’s mistakes have now put everyone invested in stocks and bonds in a similar, topsy-turvy boat.    As markets flip flop around tomorrow, we offer the following TWO reminders:   Research indicates that bear markets do not bottom until the VIX (Volatility Index) hits 40. Today it closed at 21.²  A recent analysis by equity strategists at BNP Paribas concludes that the VIX is a reliable indicator of market capitulation and, therefore, useful for determining whether the bear market has come to an end. They found that the median VIX level at past bear-market bottoms was 40.5, well above the VIX’s highest level hit (at least so far) in the current bear market (which is 36.45). Furthermore, since the firm found that spikes “in volatility have on average come at the same time as the trough in the market,” they conclude that the bear market has not yet hit bottom.³ Research also indicates that bear markets don’t hit their bottom until after the Federal Reserve is finished hiking interest rates.⁴