Hi YXI friends,

Yesterday, at the intraday low, S&P 500 (SPY) reached the 10% drop from its all-time-high, which is officially the “market correction” territory. Given the heightened volatility and risk-off mode across board, investors may look towards today’s CPI for a potential turning point.

What could we expect from today’s CPI print? My primary expectation is that the risk is on a below-consensus print for the Headline CPI and in-line print for Core. I will explain in detail below.

In the second half of today’s report, we also provide our fortnightly update on Gold and Silver.

Table of Contents

• 1. CPI: Downside Risk Heightens

  • Oil Retreated in February

  • Hourly Earnings Cooled

  • Motor Vehicle Insurances Costs Flattened

  • Shelter Costs Rose

  • Market Impact on Bonds and Equities

• 2. Gold (GLD)

• 3. Silver (SLV)

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. CPI: Downside Risk Heightens

CPI Data Expectations

At 8:30am on Wednesday, investors will learn about the latest CPI data regarding February prices.

It is worth reminding that while the Fed’s target inflation metrics are based on the PCE, due to the much earlier timing of the its release and feedthrough effect, the Fed places great importance on CPI. The difference between the two measures is that CPI looks at the changes in the urban price data, while the PCE accounts for suburban / rural too.

The street expects a slowdown in both the Headline and Core CPI MoM, from 0.5% and 0.4% respectively in January to 0.3% for both in February.

I think the slowdown is a reasonable expectation, although the risk weighs towards downside this month. I will explain why below.

Oil Retreated in February

In January, the impact of oil price spike contributed to 15% of the overall CPI. This is a meaningful amount. Over time, there is a tendency for oil prices to lead inflation, both as outright impact but also due to the increasing energy demand that signals economic growth.

CPI vs WTI MoM % Change

When comparing the MoM changes for CPI vs. WTI Crude, we see that while WTI is volatile, CPI does tend to follow WTI changes. This relationship is not perfect (nothing is), but we can still deduce where the directional risk lies.

In February, WTI’s average price dropped sharply (-6%) from January. This likely pulls the headline CPI back down, potentially below the 0.3% MoM consensus expectation.

Hourly Earnings Cooled

Changes in hourly earnings from the Nonfarm Payrolls data show a close directional relationship with Core CPI. This is because hourly earnings feed into services costs, which if not driven by productivity gains can pressure non-housing services prices higher.

We observe a pullback in hourly earnings in February, which should turn Core CPI lower.

Motor Vehicle Insurances Costs Flattened

Motor vehicle insurances came in hot in January (up 2% MoM), likely due to the beginning-of-year reset.

I have pulled in the state-by-state car insurance costs from Insurify. Using a crude average, we find that car insurance costs in February were unchanged. This should help pull back core CPI.

Shelter Costs Rose

The dark horse in Core CPI is Shelter, due to its great unpredictability but also a large percentage contribution to the overall reading.

And that’s, don’t laugh, is not actually our fault. Why? The Owner’s Equivalent Rent is made-up number based on hypothetical questions from surveys by the BLS (as home owners of course don’t pay rent). We can only try to guess its direction using rental data from RedFin.

In January, Shelter inflation rose (0.4% MoM vs 0.3% prior month) - we foresaw this possibility due to a spike in the Asking Rent according to RedFin. February Asking Rent has remained high, which could potentially hold up Core CPI.

Overall, I favour Core CPI coming in line with consensus due to the push and pull factors above. 

Market Impact on Bonds and Equities

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