The June CPI Report: A Potential Bullish Catalyst for the Stock Market

The stock market is on edge. Inflation remains stubbornly high, the Federal Reserve continues its aggressive rate hikes, and recessionary fears are looming large. But amidst this uncertainty, a beacon of hope might be shining through in the form of the June Consumer Price Index (CPI) report, due to be released on July 12th. According to Tom Lee, head of research at Fundstrat, this report could be a game-changer for stock market bulls.

Why is the June CPI report so crucial?

The CPI is a key economic indicator that measures the average change in prices paid by urban consumers for a basket of consumer goods and services. It’s a widely-followed gauge of inflation, and its movements can have a significant impact on investor sentiment and market direction.

Fundstrat’s bullish outlook is based on a few key factors:

• Declining energy prices: Energy prices have been a major driver of inflation, but they have started to cool down in recent months. The June CPI report is expected to reflect this downward trend, potentially leading to a significant drop in the headline inflation rate.

• Weakening demand: Consumer demand is showing signs of weakening, as rising prices and interest rates are putting a strain on household budgets. This could further contribute to easing inflationary pressures.

• Supply chain improvements: Supply chains are starting to normalize after pandemic-induced disruptions. This could lead to reduced production costs and lower prices for goods.

Data points to support Fundstrat’s optimism:

• Gasoline prices: According to AAA, the national average price for regular gasoline has fallen by over $1 per gallon since June 2022.

• Used car prices: The Manheim Used Vehicle Value Index, a leading indicator of used car prices, has declined for five consecutive months.

• Shipping costs: Freight rates have fallen sharply in recent months, indicating easing supply chain pressures.

But it’s not all rosy.

While there are reasons to be optimistic about the June CPI report, there are also potential risks that could dampen the bullish sentiment.

• Core inflation: The core CPI, which excludes volatile food and energy prices, has remained stubbornly high. This suggests that underlying inflation pressures are still significant.

• Wage growth: Wages continue to rise, albeit at a slower pace. This could contribute to persistent inflation if businesses pass on higher labor costs to consumers.

• Geopolitical uncertainty: The ongoing war in Ukraine and tensions between the US and China could create further volatility in energy and commodity markets, impacting inflation.

The potential impact on the stock market:

If the June CPI report shows a significant decline in inflation, particularly in the headline rate, it could trigger a rally in the stock market. A cooler inflation outlook could lead to:

• Reduced expectations of aggressive Fed rate hikes: This would be positive for stocks, as it would reduce the risk of a recession.

• Increased investor confidence: Lower inflation could lead to more optimistic projections for corporate earnings and economic growth.

• Improved valuations: Lower interest rates could make stocks more attractive relative to other investments.

However, a disappointing CPI report could lead to a further sell-off in the stock market:

• Increased expectations of Fed tightening: If inflation proves to be stickier than expected, the Fed may be forced to continue raising rates aggressively, leading to economic slowdown.

• Eroded investor confidence: Persistent inflation could lead to pessimism about future economic growth and corporate earnings.

• Higher discount rates: Higher interest rates could make stocks less attractive, leading to lower valuations.

The bottom line:

The June CPI report is a crucial event for the stock market, potentially providing a much-needed catalyst for bulls or adding fuel to the bear market fire. While the current data points towards a potential cooling of inflation, it’s important to consider the potential risks and volatility.

Investors should monitor the report closely and adjust their portfolios accordingly. This is not a time for complacency. A thoughtful and strategic approach, based on a deep understanding of the macroeconomic landscape and its potential impact on individual sectors and companies, is essential to navigate the current market volatility.