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. 

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.

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