From the latest Macro View by Bloomberg commentator and former Lehman trader, Mark Cudmore

Equities Must Fear CPI Now the Fed Put Era Is Over

A surprise in either direction from today’s U.S. consumer price index print is likely to hurt global stocks.

For many years, in the wake of QE, we became used to markets where “good data is good for equities and bad data is good for equities.” The logic was that bad data implied a greater likelihood more liquidity would be pumped into the system, whereas good data inspired confidence that the economic recovery was on track.

Today might mark a turning point where we more frequently trade the opposite dynamic. The Fed has fought so hard to convince investors that the economy can cope with hikes and balance-sheet reduction that it may have boxed itself into a corner. It can’t retreat from its policy path without seriously undermining its credibility.

If CPI misses to the downside, then investors will fear the Fed is making a terrible policy mistake with its determination to raise rates again in December. On the flip-side, if CPI beats, then traders will have to price in a much greater possibility that the Fed follows through on its forecast of three more hikes in 2018.

That level of tightening is still absolutely not priced into asset markets. The acceptance that policy normalization is a sustainable theme would alter the whole trading framework, because forecasts for funding and discount rates would have to be entirely revised.

That’ll be negative for global equities, emerging markets and commodities, but the most acute pain is likely to be in U.S. stocks, where a generation of investors have been programmed to believe the Fed will always have their back.

If inflation slows again and the Fed doesn’t backtrack on its policy tightening, then this trading dynamic might become increasingly similar for all major U.S. data releases. It’ll be an era of “bad data is bad for equities and good data is bad for equities.”

Disappointing data will be portrayed as a sign that the financial-market guardians are sleepwalking toward disaster. Positive data will cause global equity markets to sell-off as they register that rate hikes are coming much quicker than priced.

The new dynamic won’t necessarily sustain for months, let alone years, but we may have reached the crucial point where asset markets will throw a tantrum until we get clarity on whether it’s the Fed or rates markets that need to give ground.

Expect equity pain to continue in the short term while this plays out.