Hi YXI friends,

On Wednesday, the December CPI printed a softer Core CPI reading than the market estimate, just as the 30-year US Treasury yield flirted with the 5% milestone.

The CPI readings provided a relief rally in bonds and stocks, with the front end of the yield curve moving 12-14bp as the market reprices a higher chance of two Fed cuts this year.

Let’s review in detail what the latest CPI dataset entails, what it means for the Fed, and the how our core single-name stocks could fare based on the price technicals.

For premium subscribers, we have trade setups among the Magnificent 7 stocks. If you haven’t already, you can claim your 7-day risk-free trial today to access the most actionable, high risk-reward ideas.

Housekeeping: Our next few pieces will separately focus on China and individual banking stocks after the latest earnings.

Table of Contents

• 1. December Core CPI Undershoots

• 2. Bonds Rallied, Yields Lower

• 3. TLT: Time For Reversal?

• 4. SPY and QQQ: Will They Continue The Climb?

• 5. Magnificent 7

  • NVDA (Long Trade Idea)

  • AAPL

  • AMZN

  • TSLA

  • MSFT (Long Trade Idea)

  • GOOGL

  • META

DISCLAIMER: This newsletter is strictly educational. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note's date of publication and are subject to change without notice.

1. December Core CPI Undershoots

The Headline CPI came in at 0.4%, same as the consensus estimate, in December, mostly driven by a sharp spike in Energy prices. This puts the YoY Headline CPI at 2.9%, a third consecutive rise.

Core CPI, however, came in a tick lower than the consensus estimate, at 0.2% MoM. This is thanks to a broad-based slowdown across Commodities (ex-food and energy) and Medical Care Services.

Overall, the 3-month annualised changes for Core CPI and Services (ex-rent) have slowed, an encouraging reversal of the upward trend in H2 2024.

CPI YoY Changes Since August 2024:

The table above shows the trend of individual categories for the past 5 months. The large MoM spike in Energy still translated into a declining YoY inflation figure. The biggest drivers of Core CPI, Rent, Owner’s Equivalent Rent (OER), and Motor Vehicle Insurance are all trending down YoY for the past 5 months.

Are they moving as fast as the Fed would hope? No. But they are moving in the right direction each month, which is what really matters over time.

Some would argue that the Core CPI is really what the Fed cares about, because energy prices are out of their control.

I do think at this point in time, while the Fed could find comfort in declining Core CPI figures, they would look at inflation data as a whole. For example, if the Headline CPI is very high while Core CPI is in line, the Fed could hold rates higher for longer and induce a lower Core CPI to offset the Food & Energy components. After all, people care about how much they spend each month as a totality.

2. Bonds Rallied, Yields Lower

Before we zoom into Wednesday’s price action, I would like to share this chart first. It is our own indicator of the Fed liquidity, consisting of the Fed’s balance sheet, Reverse Repo, Treasury General Account, and Bank Term Funding.

Rising Fed liquidity (in red) is generally supportive of bond prices (yields lower).

We saw a consistent declining trend in the Fed liquidity (red) from early November into the year-end, coinciding with a sharp rise in the 10-year Treasury yield.

I’m not saying this factor alone explains the moves in the 10-year - there were also rising inflation expectations, positive US data, and term premium - but the shrinking Fed liquidity did provide unfavourable conditions for bond prices.

However, in the past two weeks, the Fed liquidity has recovered by over $300 billion. This lends a more favourable condition for bond prices to find near-term reversal.

After the CPI, outright bond yields fell by 10-12% across the curve.

This is largely influenced by the market pricing in more Fed cuts this year, from just 1 cut to a 50% chance of a second cut.

The FOMC Path Priced By Fed Funds Futures:

Currently, the market prices 0% chance of a cut for the upcoming January meeting.

My personal read is that the Fed is now in a wait-and-see mode, not necessarily just for the incoming CPI / PCE data, but also the exact policies Trump intends to implement post-inauguration.

Trump wants lower interest rates from the Fed, which means his team, unlikely favours aggressive tariffs to further spook the bond market. A Bloomberg report on Monday suggests Scott Bessent and co favour plans for gradual import duties 2%-5% a month on trade partners.

A final note for CPI is that the beginning of year inflation levels in 2024 surprised to the upside, as businesses and services hiked prices sharply. The series of hot readings priced away the aggressive bond market expectation of 6-7 cuts at the beginning of last year. A repeat of the 2024 Q1 surprises could further put the Fed off any immediate cuts.

3. TLT: Time For Reversal?

For technical analysis, our main method is the Elliott Wave Theory.

TLT Daily (https://www.tradingview.com/x/Na4rNiXZ/)

Ahead of the CPI, TLT’s wave C already reached our target zone of $85 for the 1.236 extension of wave A. Typically, this is the termination zone for wave C. If going significantly beyond this (and especially breaking the 2023 low), our primary thesis is rendered invalid, and we need to reassess the price technicals.

However, for a prudent entry, which I believe is warranted in this environment, we could wait for the market to show a 5-wave-up plus 3-wave-down pattern off the pre-CPI low first, on the hourly chart.

Why? This would confirm that the main trend has switched to TLT moving up, rather than just a corrective rally that eventually fades away.

4. SPY and QQQ: Will They Continue The Climb?

Claim Your 7-Day Free Access To YXI Premium