• The Thursday launch of the July CPI report ought to spark a large inventory market rally, in line with Fundstrat’s Tom Lee.
• Core CPI is anticipated to be 0.22%, however Fundstrat expects the CPI report back to undershoot at 0.15%.
• “The first driver stays the drag in CPI coming from the autumn in used automotive costs,” Lee stated.

Buyers ought to count on a “sizable rally” within the inventory market following the Thursday launch of the July CPI report, in line with Fundstrat’s Tom lee.

Consensus estimates recommend Core CPI to be 0.22%, however Fundstrat’s information science crew estimates that inflation will undershoot to simply 0.15%, which represents an annualized charge of 1.8%, just under the Federal Reserve’s long-term inflation goal of two%.

Lee’s bullish name is important contemplating that simply over every week in the past, the Wall Avenue strategist warned buyers of a short-term inventory market sell-off on account of poor seasonality within the month of August, mixed with the flashing of a technical promote sign. Since that warning, the S&P 500 has declined by as a lot as 2.5%.

However the July CPI report may very well be the catalyst wanted to spark a rebound in inventory costs, because it may solidify the concept the Fed is completed with its rate of interest mountaineering cycle.

“We imagine +0.15% could be a optimistic shock versus consensus… The first driver stays the drag in CPI coming from the autumn in used automotive costs,” Lee stated. “In our view, this optimistic shock could be greater than sufficient to offset the ‘tape bombs’ that rattled markets on Tuesday.”

These “tape bombs” Lee referenced embody Moody’s downgrading a slew of regional banks because of the potential of a recession, in addition to worrying financial information out of China that confirmed a return of deflation.

Lee believes a cooler-than-expected July CPI report could be greater than sufficient for a inventory market rally that recovers the entire losses for the reason that begin of the month. Such a rally would equate to at the least a 2% transfer greater within the S&P 500.

A part of Lee’s confidence in a cooler CPI report stems from the truth that for the reason that finish of 2019, auto and shelter costs accounted for 66% of the rise in inflation. However now these worth will increase in automobiles and shelter are moderating significantly.

“Buyers overlook that used automobiles and housing are such outsized contributors to inflation. And as these elements cool, the remaining elements is not going to essentially result in a renewed surge in total core inflation,” Lee stated. 

Additionally serving to the potential for a inventory market rally following the July CPI report is the truth that investor sentiment has soured amid the one-week inventory market decline.

“Buyers appear to have already grow to be much more cautious and that could be a good factor from a sentiment perspective. Equities appear oversold as properly. So, we predict the likelihood for shares to rally strongly after CPI may be very excessive,” Lee stated. 

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