The consumer price index (CPI) reading for January is highly anticipated by traders as it has the potential to sway the stock market. According to JPMorgan’s traders, the outcome of the CPI reading could significantly impact stock prices. Economists predict a 0.2% increase in the CPI for last month and a 2.9% increase from the previous year. These figures indicate a slight decline from December’s numbers of 0.3% and 3.4%, respectively. Additionally, the core CPI, which excludes volatile food and energy prices, is expected to remain steady or experience a slight decrease. The consensus estimates suggest a 0.3% increase on a monthly basis and a 3.7% increase from the previous year. However, December’s figures showed gains of 0.3% and 3.9% in these respective categories. The stock market is eagerly watching this data because a lower inflation trend may result in the Federal Reserve cutting interest rates. Conversely, a higher-than-anticipated CPI reading could have a negative impact on stock prices.
The stock market experienced a glimpse of how it might respond to the CPI reading on Friday when a downward revision in December’s CPI reading led to an increase in stock prices. However, overall, JPMorgan traders do not expect the upcoming CPI reading to significantly alter the narrative around rate cut expectations, which are currently projected for May or June. The CME FedWatch Tool indicates a 52% probability of a quarter-percentage-point cut in May. In light of this, JPMorgan’s U.S. market intelligence group has outlined five possible scenarios for how the S&P 500 might react to the month-over-month core CPI reading.
Scenario 1: “Disinflation Firmly Entrenched”
With a 45% chance, a CPI rise between 0.2% and 0.3% suggests “disinflation firmly entrenched,” aligning with Federal Reserve Chair Jerome Powell’s desire for positive inflation readings. JPMorgan traders anticipate a 0.5% to 1% increase in the S&P 500.
With a 25% probability, a CPI increase of 0.1% to 0.2% could drive demand for longer duration bonds and potentially benefit underperforming sectors. The S&P 500 may gain between 1% and 1.5%.
Scenario 3: Worries About Core Inflation
There is a 22.5% likelihood of an in-line reading between 0.3% and 0.4%. This outcome would raise concerns that core inflation is more persistent than expected, leading traders to analyze the distinction between core goods and core services. If the core goods reading is higher, it could indicate the impact of conflicts in the Red Sea being felt in the supply chain. JPMorgan traders anticipate a 1% to 1.5% decline in the S&P 500 in this scenario.
Scenario 4: Collapse in Bond Yields
With a 5% chance, a CPI outcome below 0.1% could be a result of weaker-than-expected housing prices. This scenario would trigger a “collapse in bond yields” and potentially initiate an “everything rally” in stocks. Additionally, expectations for a rate cut in March would surge above 50%. The S&P 500 could experience a rally of 2% to 2.25%.
Scenario 5: Higher-Than-Expected Inflation
With a 2.5% chance, a CPI reading above 0.4% would likely have a significant impact on Treasury yields. This outcome would lead to a delay in rate cut expectations over the course of the year. It could also create doubts among investors about the possibility of rate hikes in the current year. JPMorgan traders expect a decline of 1.75% to 2.25% in the S&P 500 if this scenario occurs.
The upcoming CPI reading is highly significant for the stock market. While JPMorgan’s traders do not anticipate a major change in rate cut expectations, the various scenarios presented suggest potential outcomes that could significantly impact stock prices. It remains to be seen how the CPI reading will unfold and how the stock market will react accordingly. Investors should closely follow the release of this data as it could provide valuable insights into the future direction of the market.
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