It's a pivotal week ahead for markets as the Fed considers yet another pivot — lessening rate hikes. Markets are advancing in anticipation of tomorrow morning’s reading on consumer prices. In a best-case scenario, indices could rally as much as 10% on a softer CPI reading. Cooling inflation, similar to last month’s, could notch the S&P 500 yet another best post-CPI day on record.

Let's dive into this week's top stories and trading opportunities.

Bottom Line Up Front

• Kalshi Whispers forecast 0.3% MoM CPI inflation in the month of November.

  • Tomorrow at 8AM EST listen to our Twitter Spaces, where we'll analyze the latest CPI print. Set a reminder now.

• Kalshi Whispers forecast a 50 bps hike at the Fed December meeting (92% confidence), with a small outside chance of 75 bps.

  • Wednesday at 1:30PM EST tune in to our Twitter Spaces, where we'll cover the latest Fed hike and its implications. Set a reminder now.

• Join our Townhall with legendary prediction markets trader, Jipkin, tomorrow at 8:30PM EST. Add to your calendar or learn more below.

Forecasting Tomorrow's Inflation Today

Next two CPI reports likely to come in soft.

The Kalshi Whisper is 0.3% month-over-month CPI inflation in the month of November. There is a 22% chance that the number will fall at 0.2%, and a 26% chance it will be exactly 0.3%.

The market is more confident regarding core CPI inflation, where the Kalshi Whispers are at 0.3%, with a 29% chance of falling at exactly 0.3% and a 28% chance of 0.4%.

In the month of December, Kalshi forecasts 0.0% month-over-month headline CPI inflation, and 0.3% month-over-month core CPI inflation.

How has the November forecast changed?

Expectations have tumbled ever since the unexpectedly low October print (expected 0.7% - actual 0.4%). Median core expectations for the month of November fell from 0.36% to 0.24%, though it has since slowly crept up to 0.32%. Neither the December 1 PCE and wage data release nor the December 2 non-farm payroll employment release caused traders to substantially revise their forecast.

Why so low in December?

The principal cause of the difference between November and December headline forecasts are gas prices, which will not appear in the core data. Gas prices fell 10 cents in the week ending December 5, and Kalshi markets forecast prices to fall another 15 cents in the week ending December 12. Private data sources such as Zillow and Apartment List have shown marginal housing and rental prices tumbling since the late summer, but due to methodological differences, this data is unlikely to start showing up in the monthly CPI reports until early 2023.

What does this mean?

A 0.3% headline/core inflation print (annualized 3.6%) would represent a rapid deceleration in inflation from its current rate of 7.7% headline/6.3% core, and the forecast for December represents more encouraging news on that front. That bodes well for avoiding the specter of recession: perhaps the largest extant risk factor is that stubbornly high price level growth could cause the Federal Reserve to tighten monetary policy even further and throw the labor market into recession. If inflation falls as Kalshi’s markets expect, anticipate lower mortgage rates, and a strong labor market through 2023. But we’re not out of the woods yet: Kalshi markets still project a 42% chance of two consecutive quarters of negative GDP growth in 2023. A major surprise to the upside in the November CPI print would likely push that number north of 50%.

How do the Whispers compare to other forecasts?

This Whisper differs substantially from the Fed’s Inflation NowCast. As of Monday, December 12, the Fed was projecting 0.47% headline CPI inflation and 0.51% core CPI inflation in November, and 0.37% headline and 0.51% core in December. They map identically to Bloomberg’s median forecast, which similarly projects both 0.3% headline and 0.3% core (the economic survey is slightly different, with a 0.2% headline projection).

Forecasting Wednesday's FOMC Today

Market confident in a 50 basis point hike

Kalshi forecasts a 50 basis point (bps) hike at the Fed December meeting (92% confidence), with a small outside chance of 75 bps. Another 50 bps hike is projected for February, bringing the target range up to 4.75-5.00% (59% confidence). The current projected terminal rate is 5.00-5.25%, first likely reached at the March Federal Reserve meeting.

Why so confident?

The recent unexpectedly low inflation print for October is the most important factor: the probability of a 50 bps hike jumped from 53% to 76% as soon as the data appeared.

Recent comments from officials such as by Federal Reserve Governor Christopher Waller may have further contributed to the market’s conviction that the Fed will back off its recent 75 bps pace.

Why is there still a chance of 75 bps?

CME Fed Fund futures imply a 75% chance of a 50 bps hike, while Kalshi’s are more confident at 92%. Despite this greater confidence, 8% is not 0% and these are the types of risks that can substantially shake markets.

The critical date is December 13, the day the November CPI inflation numbers are released, which falls on the morning the Fed meeting starts. If inflation comes in unexpectedly hot, then the FOMC may feel compelled to maintain a more aggressive monetary policy posture.

For instance, Kalshi Whispers attribute roughly 8% chance that the month-over-month headline print could hit 0.5% or above and a roughly 3% chance that it arrives at 0.6% or above. If either of these outcomes occur, the FED might reconsider its current course. In the meantime, stay abreast of the minute by minute whispers on the forecasting dashboard.

About the Kalshi Whispers

A “whisper” number is a private, unofficial number that is circulated between high net-worth people, Wall Street traders and hedge funds during the blackout period before data is released. Analysts and economists at banks continue to revise their estimates during the blackout period, but share their new forecasts with a limited clientele. They call them “whispers” because they’re not public and not broadly accessible.

Kalshi forecasts serve as the “whisper” right now before the release tomorrow. The whisper numbers come from market prices based on CPI, core CPI and target fed funds markets. Markets are purely directional: traders purchase binary contracts on a central-limit order book that pay out based on conditions such as “CPI inflation exceeds 0.2% in November 2022”. From these contracts, one can simply extract the probability of any given release. For example, the probability of CPI inflation equaling 0.2% is equal to the price that CPI inflation exceeds 0.1% subtracted by the price of CPI inflation exceeding 0.2%. Projections for a given day are based on a volume-weighted average of prices paid for that day. Federal funds rate projections come from binary markets that pay out on the basis of the upper bound of the Federal Funds target range.

Kalshi markets have a history of accuracy. The median Fed projections have correctly identified the size of the rate hike for each meeting since the first Kalshi Fed projection in July 2021. The median CPI forecasts have been equally accurate or more accurate than the Bloomberg economist survey and the Cleveland Fed Nowcast in 10 of the last 12 months.

Strategize for the CPI & FOMC before they drop

We're hosting a mini-series to help you strategize trading on Jerome Powell's favorite markets--inflation and Fed interest rates.

Up first is inflation. Inflation expectations are tumbling ever since the unexpectedly low October print. We're sweeping in to explain why. Set a reminder for our Inflation Twitter Spaces tomorrow at 8AM EST for live coverage and analysis of the CPI print.

Then, tune in on Wednesday at 1:30PM EST to hear how to trade based on our Fed forecast -- which has been perfect in 2022.

Each Twitter Spaces begins 30 minutes before the announcement and ends 30 minutes after, in order to best optimize your trading strategies. Set a reminder in each of the links above, or down below.

Learn from a Trading Legend

What: You're invited to a townhall where our prediction markets trader, Jipkin, walks us through his trading workflow and answers your questions. He's an everyday guy — or was, until he made a living trading prediction markets. Now, he's willing to show us how he thinks through trading and give us insight into his strategies.

When: Tuesday, 12/13 at 8:30-9PM EST

Where: https://us04web.zoom.us/j/75769021590?pwd=6bFUZ95Lq0ewaRdDpZgGe3oRHhdqY5.1

Don't miss out on the chance to learn from this living legend. If you're as excited as we are, you can ask him questions ahead of time.