Critical Inflation Report *just* FLIPPED [Watch Before Thursday]

[00:00:00] Speaker 1: boy y'all better buckle up because inflation expectations have just shifted for the cpi data release which is in less than two days from now which is kind of remarkable january 12th is when we're going to see the next inflation release i'll of course be live streaming it but i need to tell you a warning up front inflation expectations have shifted so what we saw earlier about two weeks ago was that inflation expectations went from a headline of 6.7 to 6.5 month over month was expected to come in at 0.0 and core coming in at 0.3 so the headline going from 6.7 to 6.5 and uh and that sort of reduction down in inflation being clear but this just changed again this morning this number right here headline month over month for the first time in this crazy cycle is now expected to come in at not just 0.0 not 0.1 but negative 0.1 that's the expectation now now i actually get nervous when we have low expectations like that as excited as i am that we're seeing those expectations move down rather than up and we're going to talk about how the market might react to those in just a moment one of the things that i hate is when the surveys are so low it makes it harder to beat the surveys to the downside right i mean think about it if the surveys were 0.1 and we got negative 0.1 everybody would be having a party if the survey is point negative one and we actually get zero everyone's disappointed even though that's better than coming in at 0.1 positive right so the whole expectations thing with the market is just nutso and in the short term beating these or missing these really matters a lot in fact let's look at how the market might react based on jp morgan's opinion that's this uh actually let's start with this chart right here so if we get a headline read of above 6.6 now remember the current consensus is 6.5 so now they're suggesting if we get a print above 6.6 one of the better plays would be shorting the jpm cyclicals versus defensive index and they maybe see the s p 500 down about 2.5 percent they see a 6.6 percent read from the 7.1 percent where we are now as a bearish outcome even though that trend is nice it's one of those trends where the federal reserve can come out and say well see we still have more to do in fact bowman they're doing the summary of her right now here on cnbc i could just give you the summary basically bowman's like the usual talk she's one of the newer members over at the fed now and she's doing her usual well basically doing the usual mouthpiece uh that we see federal reserve officials tell us and that is we're going to continue hiking so in other words probably 0.25 rather than zero for the next cycle that's important i'll explain that in a moment uh we are going to keep rates higher for longer so don't think we're going to cut rates too darn fast uh and we still have a lot of work to do those were some of the the key things that she had to say you know jamie diamond came out this morning suggesting hey there's like a 50 chance the fed ends up having to run up to six percent on the fed funds rate the market doesn't believe this though as far as the market can throw it which given that the market can't throw uh except maybe make us throw up is not very far so you take a look at this this is the fed futures measure of expectations for how much the fed is likely to hike at the end of january first day of february and you can see we're sitting at a 21 percent probability of actually staying at zero hike and a 79 percent probability of us getting a 25 basis point hike so clearly the federal reserve is noticing this and they're sending their minions out to the market to cnbc or whatever to say we've got more hikes to do because the fed ideally wants this higher and this lower they don't want the market starting to price in zero because it eases financial conditions too much although i will say if you go over to bonds right here they jump today 11 basis points on the 10 year kind of wild anyway let's go back over here and let's look at these different scenarios play out uh so they also mention here if prints come in above 6.8 then think you're catching a tail event that would in other words a tail event is something that is much less likely to happen right so generally when you think about statistics you want to think about this this bell curve that looks somewhat like this a right side tail event and then a left side tail event crazy shot to the downside is a left side tail risk a crazy shot to the upside is a right side tail risk uh and so generally we would expect that the result will be somewhere within one to two standard deviations of this so sort of one standard deviation or two standard deviations out once you start getting further out then you start getting into those like crazy rare like three sigma events right like two deviations out is a two sigma event who remembers that from vlad in the robin hood days anyway let's keep looking at uh some of the expectations here uh okay oh and i do want to remind you uh as a short notice thing we opened up a few flights that we're doing this week for shadowing me we're uh we're gonna be traveling the next three days i'll still be covering cpi live but if you want to join those sort of last minute wednesday thursday friday we've got some space available you're welcome to join otherwise we're booked out uh until i think mid february uh and then we're filling up february march and starting to fill up april so if you want to come shadow me on the plane as we go look at real estate link down below okay so let's keep going over here so then if we get prints between 6.4 and 6.6 remember again consensus being 6.5 right over here this is a bullish outcome so this would be in line a drop from 7.1 bullish outcome and think this outcome produces a decline in volatility across assets well that would be nice although the vix index is pretty low but you you're just seeing these crazy moves in stocks i mean just look at for example uh tesla you know yesterday tesla was up like eight or nine percent closes the day up 5.9 percent now it's down three percent the vol utility is crazy uh anyway given the moves ahead of cpi print the initial spike is likely to fade through the season look for tech to lead in this scenario okay cool that they think is a 65 percentage point possibility that we're going to see something pretty much in line now they do think there's also this chance of shooting to the downside 6.4 percent and this would they they think you would have to really like materially miss to the downside they see this as as relatively a low chance 20 chance of being anything below 6.4 really a left side tail risk to see something come in even below six percent not likely uh so more uh they actually say here stated differently the largest change comes if the market reprices the fed's march meeting as a pause which seems likely only if the cpi prints below 4.5 to 5 uh yeah we're not seeing something coming that low uh the outcome produces a three to three and a half percent rally in the s p 500 anything under 6.2 would be their version of a tail event like a big shock to the downside miss which would be great but let's look at those expectations that a 20 probability so they actually see the odds of a bullish green market tomorrow if you add these odds together here at 85 percent now let's hop over here and look at the march meeting which before the february meeting we're going to have one cpi report we'll also have another employment cost index report on the 30th i believe it is or the 31st of the month we'll also have a bunch of earnings for companies that are going to go through so we'll see those uh before the feb 1 meeting but before the march 15th meeting we'll also get february's inflation data and the march 15th data oh this is quite interesting so look at this this has the market pricing a 65 percent chance that we are actually going to be at 225 basis point hikes so 65 chance 25 25 no march pause and if we don't get that march pause they actually have a 46 chance that we're sitting at 4.75 to 5 percent and that maybe that pause is actually sitting in may so really to get that pause moved up over here where uh you know right now we're only pricing in a 16 chance for march following 25 over here but again uh there's still this 21 chance the market sees that we get a big miss on cpi tomorrow uh not tomorrow on on um thursday and uh in the it's on the 12th and then the fed ends up uh oh man uh fed ends up uh pausing early i don't know about that but that would be quite fascinating let's see what else we have in this jpm report there's some interesting things in here so here we've got the three month average change in employment they really show you how we've slowed the labor force down shifting from in the first half of the year gaining about 440 000 jobs to now being closer to 366 in the in q3 and 247 in q4 obviously we also think that these numbers are vastly overstated as people start taking on multi-jobs uh they did indicate that they actually liked seeing a decline in the average work week to 34.3 they see this as an indicator that there's little pent-up demand for more workers which is potentially good for keeping that inflation spiral down or the odds of an inflationary spiral down they do uh reiterate though that the fed wants to be very clear here against the narrative of pausing or u-turning too soon even though the market thinks this is going to happen the fed in terms of being a mouthpiece of of their plans does not want to send that signal too soon this is why i personally believe they're probably going to have that very hard face of of hiking on until they actually decide to u-turn and that could end up being too late but i think this the the early lead-in signals for that potential u-turn uh won't be coming too early the fed's going to remain pretty uh anxious and and tight uh for longer so probably at least six more months which kind of sucks but this is what it is then uh what do we have over here we've got global outlook scenarios soft landing being priced here at about a 25 chance uh hikes after q1 this would be bad uh with a hard landing then coming in 2024 so if they keep hiking after q1 which would be into may oh uh that's probably your hard landing scenario uh and uh and and then that would maybe be around a 30 probability then uh you do potentially have this trading sideways going on with a recession in late 2023 about a 35 chance here sitting uh sitting in a late 2023 recession or just straight up recession in the first half 15 chance so it does seem like statistically based on these numbers put together by jpm we're probably looking at some kind of recession between q3 to q2 so this would be q3 2023 and 2024 and somewhere in there you would probably have already conducted enough damage to keep us in a recession but you would expect some kind of u-turn from the federal reserve within that range so that could potentially mean that march is the last 25 bp hike and then you sit still may you sit still june right these are all zeros and then once you realize crap we're probably in a recessionary environment maybe uh not even come july right we keep seeing the zeros maybe come september you actually start seeing cuts no guarantees right i mean it's also entirely possible that they just continue going up and we actually approach six percent rather than coming down but it's all predicated on on what cpi does and so far the expectations are rosy again though rosy expectations has a tendency of disappointing so the fact that those expectations got revised to negative point one uh i mean i know that's exciting and and a lot of folks were excited when they saw that revision but uh it actually personally makes me nervous because again i would have rather had the expectation be zero and then get point one to the downside to the negative right so who knows anyway thank you so much for watching check out the links down below for the programs on building your wealth for uh shadowing me and uh well cheers folks we'll see you in the next one goodbye