Equity market bulls should be encouraged by the price action in markets today. The CPI print was hot but stocks are in positive territory after shaking off some heavy selling early. Perhaps that's indicative of a market that was ultra-cautious and of the data but it's certainly not indicative of one that's looking for an excuse to implode.
What's interesting is that yields have fallen, the US dollar has declined and stock markets are higher despite the market now pricing in a 59% chance of a 100 basis point Fed hike on July 27. That's up from nearly nothing before CPI.
Two worries instead of one?
Right now the the market is worried about a slowdown in growth and rising inflation. What if the Fed eliminates one of those worries by hiking 100 bps? That would solidify, once-and-for-all that the Fed won't tolerate high inflation and it will quicken the path back to 2% inflation.
With that, the market could cross off that one big worry and feel confident in low, stable inflation.
The flip side of that will be slower growth but the sad reality of the modern financial system is that it runs more on cheap money than strong growth. I think worries about a European natural gas cutoff are holding back markets because that would mean a brutal recession in Europe but there might be a platform for a rebound here, especially if the Fed spins a 100 bps hike as front-loading and not a signal that +3.5% rates are coming.
