Market Update: CPI Preview (12 Jan 2023)

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It’s CPI day! 

Today’s CPI is a potential curveball for crypto markets that have found a stable base to start the year. 

There is no question that the expectation for markets is another weak CPI reading, that will cement a step-down to 25bp hikes from the next FOMC meeting (Jan 31st) onward. 

Chart 1

Markets are currently pricing a 79% chance of a 25bp hike, a terminal rate of 4.94% in June, and 75bp of cuts by next January. (Chart 1)

2023’s pricing is already 3 hikes below the median FOMC expectation of 5.25% by December 2023, and 2024’s pricing is lower than even the lowest dot! (Chart 2)

Chart 2

This huge disconnect exists in spite of the repeated warnings by the Fed that there will be no cuts this year, and that they are determined to take rates above 5%. And their rate forecast is already based on inflation falling to 3% by year-end. 

The reason for this disconnect is due to sensitivities of the Y/Y reading to the individual M/M readings – for example, if we continue having a -0.1% M/M like the one forecast today (on a non-seasonally adjusted basis), then we will hit the Fed’s 2% Y/Y target by May! (Chart 3)

Chart 3

The market is thus on the optimistic side of monthly disinflation (flat to 0.1% M/M NSA), while the FOMC is on the more pessimistic side (>0.2% M/M NSA every month from here). It should be noted that the long-term run rate for inflation pre-pandemic has been 0.2% M/M. 

 

Today’s CPI

Nevertheless, the market is banking on the FOMC’s confirmation bias to the data – with no release more important than CPI.

Tonight’s expectations are 6.5% for headline and 5.7% for core, and we expect that even a 6.6% will be taken positively by markets. 

Anything higher however would be bearish for markets, with a 7% handle on headline or 6% handle on core an absolute disaster which will quickly take us to fresh cycle lows. 

Our expectation band for BTC moves on CPI is as follows:

>7% (5% chance) :  Down 10% on the day, 15k by FOMC

6.9-7%(10% chance) : Down 5% on the day, test Oct lows by FOMC

6.7-6.8% (20% chance) : Down 3-5% on the day, test YTD lows by FOMC

6.4-6.6% (30% chance) : Up 2% on the day, uncertain after

6.1-6.3% (25% chance) : Up 3-5% on the day, test 20k by FOMC

<6% (10% chance) : Up 5-7% on the day, break 20k before FOMC

There is a split between the most accurate forecast models right now: 

1. On the bull side : CPI Fixing market (6.3-6.4% forecast) – correctly predicted direction of past 10 CPI prints! (Chart 4)

Chart 4

2. On the bear side: Web 3.0 Truflation community model (6.8% forecast) – as unbelievable as its model framework, has been within 10bp accuracy for past 7 CPI prints! (Chart 5)

Chart 5

Technically, many key markets are at a make-or-break level – all contingent on today’s print.

1. NASDAQ – 10,500-10,700 support / 12,000 resistance (Chart 6)

Chart 6

2. DXY – 102 – 103 support / 105.5 resistance (Chart 7)

Chart 7

3. BTC – 17,000 support / 18,500, 21,000 resistance (Chart 8)

Chart 8

4. ETH – 1,180 support / 1,500, 1,700 resistance (Chart 9)

Chart 9

BTC and ETH will follow NASDAQ closely, which means a break of the super key 10,500 to 10,700 support on NASDAQ will have us testing cycle lows on BTC and ETH soon after. 

In summary: 

• Whisper is for a weaker-than-expected CPI (bull side) and markets are setup for that.

• Pain trade is for a stronger-than-expected print (bear side). 

• We expect follow-through on whatever number comes out, and for markets to trend into FOMC at month-end.

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