Market Warning: Watch BEFORE Tuesday.

hey everyone kevin here let's talk about

inflation expectations because guess

what's happening tomorrow tomorrow

we have the cpi data release which does

mean i will be up at 5 30 in the morning

which is kind of crazy but i'm going to

be up at 5 30 in the morning so if you

want to see the cpi data release

live i will be covering it but first

let's talk about

what expectations are and what happened

last month because last month we got

inflation data that let us know

how did prices change for consumer

prices

between april and may now we're going to

get price changes

between may and june since we're in july

and we're going to learn about

june inflation readings now the first

thing that's really useful to do is know

where we had some big pain points last

time

and that was here on things like a car

and truck rental prices

going up 12.1 percent month

over month which is insane there's a

massive

bum 4 increase in public transportation

seven percent increase in airline fees

these are some

big big big numbers so this month

look comparing essentially the end of

may or the middle of may

to the middle to end of june we want to

potentially see

those airline figures those ticket

prices going

down or stabilizing see zero

means they're still up right and that's

important to know the easy way to

picture this is here actually let's

explain it like this

go over here if let's say an airline

ticket is a hundred dollars and

then next month which is insane because

it'd be like a doubling on an annual

rate but

next month the airline prices are 112

dollars that's a 12

increase month over month we want to

potentially see that stay

at let's say go to 113 you know that's a

little less than one percent

maybe even stabilize where we have a

zero percent bump month over month

you know if we get something like oh

it's 120 that's still a big bump

we're still getting a large push in

things like airline or car

rental truck pricing right or which

could be really good for

inflationary purposes we see airline

prices or car rental prices or whatever

start coming down again to something

like oh it's going to go to 110.

now we actually have month over month

deflation

so that's going to be pretty big we're

going to be paying close attention

to what the numbers look like in uh in

the other aspects like within the data

or as dronepal says

under the hood this is really important

now headline

news is probably not going to pay

attention so much

to the weeds like we do but as investors

we like to pay attention to the weeds

what i can tell you the bureau of labor

statistics article is likely going to

show

on on most headline news articles

is going to be something as simple as

this is how much inflation we had

month over month in june and month over

month in may

we had point six percent point six

percent

for the expectations for june at least

what wall street believes

we think we're going to see point five

percent that's what wall street thinks

so if we hop on over here and we draw

this out we can see if wall street

expects

0.5 percent last month was this will put

last last month was 0.6 then we can kind

of take a little bit of a guess in terms

of what we would expect

in the actual market and kind of

reactions for the market

so if let's say month over month

inflation which is much more important

than the big headline number

last month the big headline number was

having five percent inflation which is

crazy that's

year over year so this is month over

month

and this is year over year the current

expectations are

4.9 percent for year over year measure

in

june now i personally believe that this

number

should start declining rapidly here

potentially in july but more likely by

september and october

so this ideally for june what we're

looking for in my opinion

is a number that's stable or slightly

lower which is actually what wall street

is expecting

and then we're on course for hopefully a

better inflection point to the downside

with inflation

by september and october in september

october i believe these numbers are

going to be under 3

again year over year now let's uh let's

estimate what we think

and how how the market might respond to

this right so

first things first let's talk if the

headline number so we're going to do

headline number first if the headline

expectation is 4.9

and we come in with something like 4.4

i would expect things like tech and

consumer discretionary to do

very well if inflation numbers come in

higher something like anything really

with a five in the front

i would expect banks and financials to

do better

and the reason i would expect banks and

financials to do better is generally as

interest rates arise

their profit margins can go up the same

would be true for something like a

rocket mortgage

but the more we have interest rates

potentially

trend downwards because inflation

risks are subsiding then it's no

surprise that we see like rocket

mortgage or united wholesale mortgage

company

these sorts of companies do poorly or

banks maybe not do as well as they

previously have

one way that you can kind of see how the

market is expecting changes in inflation

is by looking at the 10-year treasury

yield or the 10-year break

even which works with tips i'm just

going to keep it pretty simple and i'm

just going to look at 10 years usually

what i do

i look at 10-year inflation levels or

sorry not 10-year

inflation levels you look at a chart of

10-year treasury bonds

and when you pull that up you see this

big fear of inflation

starting around february of this year

and that kind of fear of inflation

really escaped

starting i'd say somewhere around april

and may

which is really interesting because

april and may is right when we started

getting cpi data

that was at its highest point and that's

in my opinion when the market started

realizing wait a minute

the things that are causing the big

inflation that we're seeing

in april and may this is a charge of the

10 years here

those things are temporary and those are

going to go away

so even though we went into these high

inflation expectations of oh my gosh we

might see hyperinflation when we

actually started getting the high

inflation

reports inflation expectations started

waning

and subsiding commodity prices started

collapsing we started seeing the

collapse of crypto prices which

are someone somewhat and sometimes often

seen as an inflation

hedge and so we start seeing those sorts

of prices collapse or fall

because the inflation data is showing

wait a minute the inflation is only in

temporary things again like

airline tickets or rental cars and

things like that well then it's no

surprise that we see these treasury

yields that go

down and we see some of the other

aspects of markets expecting

lower inflation now when i say the

markets potentially expect lower

inflation

know that not everyone agrees that

inflation is going to be

lower in fact around 50 people think

inflation is going to be worse

we even have this new york fed survey

that just came out in june

which says that the public expects

inflation at 4.8

percent and three years from now

believes that inflation will still be

around 3.6

which i expect in about one year will be

at

potentially even under two percent so i

personally believe that we'll have much

lower inflation but i just want to make

that clear because it's kind of a 50 50

thing like which side of the coin are

you want

or maybe you're even in the middle right

but expected inflation a year from now

so 12 months out the new york fed survey

of the public indicates the public

thinks right now that we're going to see

4.8 percent inflation

and now this is the highest level of

this survey going back to 2013.

so in other words a year from now the

public still thinks inflation is going

to be over

four percent and over three percent

three years from now

this is potentially in my opinion

because right now we

are in a moment of seeing high temporary

inflation high

you know wages going up in retail

sectors and businesses reopening

wages going up in uh hospitality prices

for airline tickets prices for cars all

these things going up

but a lot of these things are temporary

and associated with a reopening

in fact when you look at jobs data you

look at the jobs report and you

take out hospitality you're like wait a

minute wages only went up

0.1 percent which is an annual rate of

1.2 percent

for wages not related to the reopening

in other words things that are related

or potentially propped up because of the

temporary

supply shortages of oh my gosh we got to

reopen really fast again right

so let's go back to expectations here if

we see something like 4.4 to 4.6 percent

somewhere around here

i'd expect tech consumer discretionary

to do pretty nicely tesla

etsy some of these others uh right here

i think uh

we will uh let's see fine okay yeah

around five percent or above

i think banks will start doing well if

we get something in the middle it'll be

a pretty neutral

uh kind of response as an expectation so

uh then

if we jump on over to here let's do

just an expectation on month over month

so the month over month expectation is

going to be 0.5

i think on month over month honestly

anything under

0.3 is just going to be potentially even

just euphoric

i don't think we're going to get

anything under 0.3 month over month

because we're just not at that

inflection point yet i think we'll start

seeing these numbers in september and

october

unless we're starting to see that

deceleration happen even faster

so that's going to be a key marker here

so we're going to get under 0.3 i don't

think so

but that would be a big deal now if we

uh ended up month over month getting

anything

crazy which crazy in my opinion would be

like 0.9

or above that would be bad for consumer

discretionary tech

good for banks and and some of the

financials right so hopefully this gives

you a little bit of a guide again i'll

be

live streaming this at 5 30 a.m

california time tomorrow 8 30

eastern time and folks hopefully you

enjoyed this sort of preview of what to

expect tomorrow

thanks for watching and we'll see in the

next one

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