Pre-Mortem: Wednesday, 8:30 A.M.

INTERNAL MEMO. DO NOT FORWARD.
TO: Rates, Credit, Macro Strategy
RE: September CPI, six bank prints, and which of our positions is lying to us
SENT: Sunday night, because nobody sleeps before a print like this

We are about to be told that inflation is 3.7% and 2.5% on the same morning, and both numbers will be correct. Consensus for September CPI sits at 3.6% to 3.7% year on year, depending on whose poll you trust, with core at roughly 2.5% and a monthly core call of +0.2%. Subtract one from the other and you get a 120 basis point wedge. Energy built that wedge. Please keep that in mind while the desks around you argue about "re-accelerating inflation," which is a phrase that currently means "gasoline."

1. The print is a photograph of the worst week

September CPI measures September. Retail diesel set its record of $6.53 a gallon on the 22nd of that month. The G7 reserve release came on October 2. The Putin diesel announcement came Friday, October 9, and took ULSD down 4.6% to $4.73 in a single afternoon. None of that touches Wednesday's number. We get the pump price at its ugliest, stamped with an official seal.

The October CPI, which will show whatever relief the Russian cargoes and the reserve draw manage to deliver, is published in mid-November. The midterms are November 3. The voters will feel the cheaper diesel before the statisticians document it, and the Fed will meet on October 27 and 28 with only the ugly photograph in the folder. Schedule design is its own kind of policy.

2. What the Committee sees

The Warsh Fed hiked to 3.75% to 4.00% in September. The minutes showed unanimity and a majority leaning toward another move before year end. The September jobs report (+29K, unemployment 4.2%, earlier months revised down) cut October hike odds to about one in five. December still trades above 80%. Vice Chair Jefferson and New York Fed President Williams have both said publicly that the Committee should not rush the next move.

So the Fed is hiking against a core number of 2.5% because the headline is 3.7% and the 12-month inflation expectations survey from the New York Fed reads 3.9%. A hawk will say the policy rate is barely above headline in real terms. A dove will say it sits 1.4 points above core. Both are looking at the same twelve-month window from opposite ends of a very long telescope. A core print of 0.3% or higher revives October. A 0.2% print buys the doves two weeks, and the 10-year yield, sitting around 5.24% after touching 5.365% on Wednesday, will tell us in the first ninety seconds who believes whom.

3. The banks go first, and that is not an accident of scheduling

JPMorgan, Goldman Sachs, Citigroup and Wells Fargo report Tuesday. Morgan Stanley and Bank of America follow Wednesday morning, hours after the CPI lands. JPMorgan is expected to earn about $5.90 a share, up 16.4%, on $51.3 billion of revenue, with options pricing a move near 3.3%. The S&P 500 banks index fell 7.5% over the past month while the index around it climbed. Somebody out there is already trading the credit-demand question, and the answer lives in the commentary on card balances, commercial loan growth and what rising long yields have done to securities books.

Capital markets desks will probably look fine. Trading revenue loves a volatile bond market. Net interest income on a curve this steep is its own argument. Everything else is the part to read twice: how much of the loan book is still repricing, how much is a first-lien claim on someone's data center, and whether the provisions line tells the same story as the earnings line.

4. Where the book is lying

Equities sit within a hair of their record: the S&P at 7,811.54 on Friday, up more than 14% on the year, against Q3 earnings growth of 30% or better. That is a beautiful earnings backdrop and a terrible discount-rate backdrop, at the same time, in the same index. The S&P earnings yield of about 5% is chasing a 10-year at 5.24% and a 30-year at 5.61%. Equity holders are being paid roughly the risk-free rate to own the upside and the cyclical risk, which works fine until the denominator moves.

The cleanest hedge available is that the print could be boring. A 0.2% core and a headline in line would hand every position a free week, and then the next test arrives: the Russian tonnage, the Ukrainian drones aimed at the refineries that produce it, a Hormuz that sees tankers hit almost daily, and October 27.

Recommendation

Do not take a directional view on the headline. The headline is a gasoline thermometer. Take your view on core services, on the 10-year reaction in the first ninety seconds, and on how the bank CEOs describe the consumer on Tuesday and Wednesday. If those three disagree, the market will resolve the argument for us, and it will do so while we are still reading the release.

Coffee is on the 14th floor. Bring your own conviction.