We get June inflation data tomorrow.
It's expected to be the hottest monthly change in the headline CPI since January. And the year-over-year change is expected to tick up to 2.7%.
And as you can see below, that would put inflation on the 35-year average.
What was the average Fed Funds rate over the same period? 2.86%.
Where is the Fed Funds rate now? 4.33%.
On that note, Trump has now outright called for Jerome Powell's resignation, for stubbornly running overly restrictive monetary policy.
One of his short list candidates to replace Powell has outright called for regime change at the Fed. And most recently, Trump said he thinks rates "should be three [percentage] points lower."
With all of this, the market is pricing in almost no chance of a rate cut at the Fed meeting later this month, and just a bit better than a coin flips chance in September. And the betting markets are pricing in a 20% chance that Powell is gone by the end of the year — probably conservative given the recent escalation of rhetoric.
This all makes the number tomorrow (and PPI on Wednesday) more consequential, in the case of a cooler than expected report.
If the data is cooler, the screws will tighten further on the Powell Fed, and the markets may/should start pricing in a much more dovish outlook — from either a new Fed Chair or a "shadow" Fed Chair, someone waiting in the wings that will begin communicating policy to markets.
A less restrictive Fed would be fuel for closing the underperformance gap in small caps (relative to big tech) from this chart we looked at in my last note …
Notably, the market position in Russell 2000 futures is very short — at the extremes not seen since last July.
That sets up for some short covering in the case of a good (cooler) inflation number. And that would close this performance gap more aggressively (in favor of small caps, UP).
If we look back at that July 2024 analogue, the market was heavily short also heading into a big inflation report. In fact, at that time the divergence in the performance of a handful of tech giants and "the rest" of the stock market was at historic extremes.
The inflation report turned out to be the first negative print in two years (negative monthly CPI, when taken out to three decimal places). That swung the rate outlook. And the Russell 2000 went up 10% in fourteen trading days.
