The Best Investment Manager's Guide: Brace for Impact on CPI Report Day
Investors Beware: Gavekal Research warns of potential market shock if CPI report surprises on Wednesday
The markets are banking on aggressive rate cuts by the Federal Reserve, but a rise in inflation could derail these expectations, leading to a "nasty shock"
Futures market currently pricing in 100% certainty of rate cut on September 18, with 50% chance of 50 basis point cut
Expectation of full 100 basis point cut by end of 2024
An uptick in inflation could trigger "violent position adjustment," forcing investors to rethink Fed's trajectory
Debate within Gavekal team reflects uncertainty in broader market - some analysts believe inflation will surpass Fed's 2% target, while others argue factors like money supply contraction and easing supply bottlenecks will curb inflation
Fed's willingness to cut rates depends on inflation - surprise on the upside could delay cuts, causing rebound in US dollar, higher bond yields, and pressure on US equities, especially growth stocks
In case of inflation scare, safest assets might be US dollar cash, T-bills, and inflation-protected treasuries
With so much riding on upcoming CPI release, investors should prepare for potential volatility on Wednesday
Analysis:
Investors should pay close attention to Wednesday's CPI report as it could have a significant impact on the market. A higher than expected inflation rate could lead to a market shock, causing a reevaluation of the Federal Reserve's interest rate cut expectations. This could result in a rebound in the US dollar, higher bond yields, and pressure on US equities, particularly growth stocks. To prepare for potential volatility, investors may want to consider safer assets such as US dollar cash, T-bills, and inflation-protected treasuries. It is crucial for investors to stay informed and adapt their investment strategies accordingly to navigate potential market disruptions.