Market Reaction to CPI

Tomorrow, the all-too-important July CPI report comes out. Although the FOMC tends to focus more weight on personal consumption expenditures (PCE) instead of CPI, this release will give investors the first official inflation read of July. Depending on how this report comes in relative to expectations will therefore give a lot of insight into the direction/intensity of policy heading into the last four months of the year. A higher print (especially given the strength in last week’s nonfarm payroll data) would a higher likelihood for continued aggressiveness in rate hikes, while a weaker than expected print could cause markets to price in a more benign path moving forward. As of today, analysts expect headline CPI to increase 8.7% y/y, which would be a 0.4% decline from June’s rate.

Last month, analysts expected CPI to rise 8.8% YoY, but the print came in at 9.1%. Over the last twelve months, CPI has come in hotter than expected two-thirds of the time. Notably, CPI has not come in below expectations over the last twelve months but did match expectations one-third of the time. In terms of market expectations, over the last twelve months, the S&P 500 has averaged an opening gap of -49 basis points following a CPI print that was hotter than expected. That’s about twice the average gap lower of 25 bps following all higher-than-expected prints over the last ten years. The market tends to gap higher following an inline print, averaging a gain of 5.3 bps over the last twelve months and 9.8 bps over the last ten years. Click here to learn more about Bespoke’s premium stock market research service.

Following all CPI prints over the last twelve months, the S&P 500 has tended to gap lower but move close to the break-even level in the first half hour of trading. Following this initial bounce, the S&P 00 has tended to bounce around but remain in negative territory. The second half of the trading day has been much weaker, though, finishing the day down 60 basis points on the day.

Over the last twelve months, intraday performance has diverged based on the result of the report. When CPI matches expectations (three occurrences), the S&P 500 gaps higher but has surrendered those gains by about 10:30. However, following a bottom at about 11:00, stocks tend to pick up steam throughout the rest of the trading day. When CPI comes in hotter than expected, we see nearly the exact opposite. The S&P 500 gaps lower, but generally moves higher until about 10:45, when things take a turn weaker. The back half of the trading day has been notably weaker with stocks closing right near their lows of the day, booking an average decline of 93 basis points. Click here to learn more about Bespoke’s premium stock market research service.

The Quitter Market

If it seems to you like the market simply can’t hold on to gains this year, you aren’t mistaken.  The chart below shows an intraday composite of the S&P 500 on a median basis over the last 100 trading days through the end of April.  The general pattern during this period has been for the market to open modestly higher, but then sell off for the remainder of the morning.  It has then regained its footing shortly after mid-day but then sells off into the close.

Market Intraday performance

How does the last five months or so compare to history?  The charts below really put the recent trend of intraday weakness into perspective.

The first chart shows the number of days over a rolling 100-trading day period that the S&P 500 tracking ETF (SPY) traded in positive territory on an intraday basis but finished the day down.  The reading currently stands at 38 and was as high as 40 (red line) in the last week of April.  As shown in the chart below, there hasn’t been another period that the S&P 500 has had so much trouble holding onto intraday gains in more than a decade (October 2010)!

SPY intraday performance

For the Nasdaq 100 (QQQ), it has been a similar story.  As recently as April 22nd, the trailing number of times in the last 100-trading days that QQQ traded in positive territory on an intraday basis but finished the day lower reached 42 and currently stands at 40. Like SPY, the recent reading of 42 was the highest number of occurrences in a 100-trading day span since October 2010.

For both indices, the currently elevated frequency of giving up intraday gains has been extremely uncommon for the post-financial crisis period.  Interestingly enough, though, in the ten years before the financial crisis, these types of periods were a lot more common, especially for the Nasdaq.  Could it have anything to do with the fact that the last 12 years have also been one of the more accommodative monetary environments investors have ever experienced?  Click here to learn more about Bespoke’s premium financial markets research.

QQQ Intraday performance

Bespoke Market Calendar — April 2022

Please click the image below to view our April 2022 market calendar.  This calendar includes the S&P 500’s average percentage change and average intraday chart pattern for each trading day during the upcoming month.  It also includes market holidays and options expiration dates plus the dates of key economic indicator releases.  Click here to view Bespoke’s premium membership options.