samosa 14:52 PM - Jul 10 2022

CPI Data Preview - Bullish and Bearish Cases

Heading into this week, I want to make sure I am prepared for the big CPI data release on Wednesday. The important thing I want to do is not so much make a prediction, but be weary of multiple outcomes and how the market reacts to those outcomes. 

Let's Look at the Last Few Months of CPI Data. The Topline Data means all of the items in the report on a year over year basis. The CPI Core data excludes food and energy:
  • May 2022 (Released June 2022) - Topline Number was 8.6%. CPI Core was 6.0%.
  • April 2022 (Released May 2022) - Topline Number was 8.3%. CPI Core was 6.2%.
  • March 2022 (Released April 2022) - Topline Number was 8.5%. CPI Core rate was 6.5%.
  • Feb 2022 (Released March 2022) - Topline Number was 7.9%. CPI Core rate was 6.4%.
  • Jan 2022 (Released Feb 2022) - Topline Number was 7.5%. CPI Core rate was 6.0%.

The March 2022 data to April 2022 data saw the first decline on both the Topline and Core for the first time in 2022. This brought the hope that inflation could be peaking, and slowing down. However, the last release for May 2022 saw not only an increase from the previous month, but a Topline number higher than the March 2022 data. This caused the market to hit new lows. 

Now let's look ahead to the reporting coming out on Wednesday, July 13th. 
  • The estimate for the Topline is 8.8%. The Core is 5.7%.
  • So we have a high estimate on the topline and the core is expected to go down. This is all about the energy and food. 

Here are the scenarios we are watching for:
  • Scenario 1 - CPI comes in above expectations, 9%+ on the topline and Core stays near 6%
    • Bullish Argument - None
    • Bearish Argument - The market will make new lows. This shows that the Fed's actions have not been able to control inflation and with Core going up, there is no blaming this upward inflation pressure on the Ukraine war since the core ignores energy and food prices. 
  • Scenario 2 - CPI comes in above expectations on the topline, but flat or down on the Core:
    • Bullish Argument - Core not going up means that the rise inflation can be blamed on the Ukraine War and its impact on gas on food. This would start the narrative that inflation is actually peaking as we have seen relief on oil in July so far. 
    • Bearish Argument - Core is bullshit. How can you measure inflation without oil and food. Furthermore, how can you blame this inflation rate on the Ukraine War when it became an issue before the Ukraine war even began. Topline number is going up and until that number goes down, the Fed is just proving that they are far behind. 
  • Scenario 3 - CPI comes in flat at expectations on the Topline and Core:
    • Bullish Argument - Though the number is greater than the previous month, it was expected with oil. Core coming in at expectations actually sees a decrease from the previous month. This creates the same argument that inflation is only going up due to the war in Ukraine's impact on oil and food. 
    • Bearish Argument - Same bearish argument from Scenario #2 as above with Core being unreliable. 
  • Scenario 4 - CPI comes in below expectations on the Topline and Core:
    • Bullish Argument - Inflation is starting to peak and the Fed's actions are starting to work faster than the market's expectations. 
    • Bearish Argument - Just because the expectations are not met, the month over month number is still going up. Inflation is still a monetary phenomenon and the Fed still needs to take more action to combat it. 

How I am looking to play the data release based on the scenarios:
  • Short Term Plays
    • Scenario 1 - I am bearish and grabbing puts for a few weeks out. 
    • Scenario 2 - Stay on the sidelines and enter to play day to day levels.  Can't be married to one side on this result as the bearish argument is not as valid as the bullish one. 
    • Scenario 3 - Buy calls for a few weeks out as the SPY will retest 400 levels soon.
    • Scenario 4 - Buy calls for a few weeks out as the SPY will retest 415-420 levels.
  • Long Term Plays
    • Scenario 1 - Purchase puts and sit back. The economy is still headed to new lows
    • Scenario 2, 3, 4 - Do nothing long term. There is not enough data here with this monthly to comfortably enter any long term positions. 

How will the Fed React?:
  • Scenario 1 opens the door with a 100 BPS hike and confirms at least a 75 BPS Hike in the July. 
  • Scenario 2 and 3 - Fed will look at 75 BPS hike as inflation is still an issue, but this opens the door for a possible pause in hikes after July to collect more data before acting again. 
  • Scenario 4 opens the door to do a 50 BPS hike in the July meeting and again a possibility to pause hikes after the July meeting to see if inflation can start trending downward. 

Thanks for reading through this data dump of thoughts by me. Should be an interesting week ahead. 
All the statements in this report are my own and not financial advice. 

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Maverick - 1 year ago
This is an incredibly well thought out set of scenarios.

You should spread this around, so others can consider it.  You did a lot of legwork here.

75 to 100bps on July 27, IMO

Bones Tradez

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