CPI matters tomorrow. It matters if it finally moves up. It's been dragging slower and slower leaving bonds strong. We're bullish on bonds, stocks, and pretty much everything. But Elazar, the market's down today. We're here to tell you the stock market is allowed to be down.

CPI Tomorrow

The Fed's most loved inflation measure is PCE Price. It's been slow. CPIreports tomorrow. It's been slow.

It's possible that oil being up month-to-month lifts the overall inflation figure but the core inflation number that excludes food and energy should be expected to be weak until it's not.

As long as inflation is low bonds stay strong.

Bonds Versus Stocks: Reallocation?

You have GDP picking up. The Atlanta Fed says Q3 is looking up 3.5%. That would be the fastest rate of economic growth since 2014. Things are good.

Bonds usually worry when the economy picks up. Two things though; One, investors are not optimistic about growth continuing.

Who holds bonds. Lots and lots of baby boomers. Individual investor pessimism hit highs not seen since May. Why? Jobs are strong so it's not that. We think it's constant negative press reports. It's a perspective, a negative one. But perspective is reality only if you believe it.

Data, like GDP, jobs and earnings says otherwise.

The other reason other than pessimism that bonds are strong is low inflation. If inflation remains low bonds have even more reason to stay strong.

But... if inflation jumps investors probably get spooked at some point to sell their bonds.

Rates at record lows would be a risk to jump if inflation does creep back up into the picture. Normally that would be negative for stocks.

This is big...

Here though if investors sell their bonds (on a high inflation number) as the economy and earnings are doing better, they could take all that cash and start getting less pessimistic on stocks.

A bound rout could cause a further stock rally. It's called reallocation. We haven't really seen it in a while but it's a big bold move where inflation could incite bonds lower but stocks... higher.

Keep that in mind tomorrow.

Conclusion

Low inflation, good for stocks and bonds. High inflation bad for bonds and maybe amazing for stocks.