The upcoming release of the consumer price index (CPI) has the potential to sway the stock market, and investors are closely watching the outcome. JPMorgan’s traders suggest that the January CPI will continue the trend of easing inflation. Economists anticipate a 0.2% increase last month, and a 2.9% rise from the year-ago period. Core CPI, which excludes food and energy prices, is also expected to remain in line or trend slightly lower.
The stock market is sensitive to changes in inflation, and the CPI reading can influence investor sentiment. A stronger-than-expected CPI reading could cause concern among investors, as it may indicate that the Federal Reserve will delay cutting interest rates. On the other hand, a cooler CPI reading may drive equities higher, as it suggests a potentially favorable environment for rate cuts.
While the stock market reacted positively to a downward revision in December’s CPI reading, JPMorgan traders believe that the upcoming CPI reading will not significantly change the narrative around rate cut expectations. Market expectations currently indicate a 52% chance of a quarter-percentage-point cut in May. Despite this, JPMorgan’s U.S. market intelligence group has provided five possible scenarios for how the S&P 500 may react to the month-over-month core CPI reading.
Scenario 1: Disinflation Firmly Entrenched
There is a 45% chance that a rise between 0.2% and 0.3% in the CPI could suggest “disinflation firmly entrenched.” This outcome aligns with Fed Chair Jerome Powell’s desire to see positive economic data in inflation readings. In this scenario, JPMorgan traders expect the S&P 500 to rise by 0.5% to 1%.
If the CPI increase falls between 0.1% and 0.2%, there is a 25% chance that demand for longer duration bonds will increase, benefiting sectors that have been underperforming. The S&P 500 may gain 1% to 1.5% in this scenario.
Scenario 3: Concerns Over Sticky Core Inflation
An in-line reading between 0.3% and 0.4% has a 22.5% chance of reinforcing worries about stickier core inflation than anticipated. Traders will pay close attention to the difference between core goods and core services. A higher core goods reading may indicate the impact of conflict in the Red Sea on the supply chain. JPMorgan traders anticipate a 1% to 1.5% decline in the S&P 500 if this scenario occurs.
Scenario 4: Collapse in Bond Yields
There is a 5% chance that the CPI outcome will be below 0.1%, possibly due to a weaker-than-expected gain in housing prices. This could trigger a “collapse in bond yields” and lead to an “everything rally” in stocks. Additionally, expectations for a rate cut in March would rise above 50% in this scenario. The S&P 500 could potentially rally by 2% to 2.25%.
Scenario 5: Hotter-Than-Expected Reading
If the CPI reading exceeds 0.4%, there is a 2.5% chance of a significant effect on Treasury yields. Expectations for rate cuts would be pushed further into the year, and investors may start questioning whether rate hikes are still on the table for this year. Traders anticipate a potential loss of 1.75% to 2.25% in the S&P 500 if this scenario occurs.
The upcoming consumer price index reading has the potential to impact the stock market. Investors are analyzing various scenarios and their potential effects on the S&P 500. While expectations for rate cuts remain, the CPI reading will provide valuable insight into the direction of inflation and the Federal Reserve’s future actions. It is crucial for investors to closely monitor these developments and adjust their strategies accordingly.
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