The Impact of Consumer Price Index on the Stock Market

The Impact of Consumer Price Index on the Stock Market

The consumer price index (CPI) reading, which is set to be released soon, has the potential to significantly impact the stock market, according to traders at JPMorgan. The January CPI is expected to continue the trend of easing inflation, with economists predicting a modest rise of 0.2% compared to last month and a 2.9% increase from the previous year. However, any unexpected variations from these estimates could have significant consequences for the stock market.

According to consensus estimates, core CPI, which excludes volatile food and energy prices, is expected to remain stable or trend slightly lower. The consensus forecasts suggest a 0.3% increase in prices on a monthly basis and a 3.7% increase from the previous year. These figures represent a slight decrease compared to December’s CPI, which saw gains of 0.3% and 3.9% on a monthly and yearly basis respectively.

Investors are keeping a close eye on inflation trends as they speculate whether the Federal Reserve will cut interest rates. A downward trend in inflation could potentially pave the way for interest rate cuts, which is generally viewed positively by investors. On the other hand, a stronger-than-expected CPI reading could dampen stock market performance. This was evident when equities rose after December’s CPI reading was revised downwards.

Despite the potential market volatility surrounding the CPI reading, JPMorgan traders do not expect it to drastically change the narrative around rate cut expectations. Currently, markets are pricing in a 52% likelihood of a quarter-percentage-point cut in May. However, there is speculation that rate cuts may be pushed back to May or June. The exact timing and degree of rate cuts remain uncertain and are subject to change based on economic data.

JPMorgan’s U.S. market intelligence group has outlined five potential scenarios and the corresponding reactions that the S&P 500 may experience based on the month-over-month core CPI reading:

Scenario 1: Disinflation Firmly Entrenched

In this scenario, if the CPI reading rises between 0.2% and 0.3%, it would suggest that disinflation is firmly entrenched. This outcome aligns with Federal Reserve Chair Jerome Powell’s desire to see positive inflation data. JPMorgan traders anticipate a potential rise of 0.5% to 1% in the S&P 500.

Scenario 2: Modest Increase in CPI

If the CPI reading falls between 0.1% and 0.2%, this scenario could lead to increased demand for longer duration bonds and strengthen sectors that have been underperforming. In this case, the S&P 500 may gain 1% to 1.5%.

Scenario 3: Core Inflation Stickier Than Expected

A reading between 0.3% and 0.4% in core CPI would suggest that core inflation is stickier than anticipated. Traders would closely analyze the difference between core goods and core services. A higher core goods reading may indicate disruptions in the supply chain due to conflicts in the Red Sea. JPMorgan traders predict a decline of 1% to 1.5% in the S&P 500 in this scenario.

Scenario 4: Unexpectedly Low CPI

If the CPI reading falls below 0.1%, potentially due to a weaker-than-expected housing market, it could result in a “collapse in bond yields” and trigger a comprehensive rally in stocks. Moreover, rate cut expectations for March would surge above 50% if this scenario occurs. The S&P 500 could rally by 2% to 2.25%.

Scenario 5: Unexpectedly High CPI

In the event of a higher-than-expected reading above 0.4%, it would likely have a disproportionately negative effect on Treasury yields. Rate cut expectations may get pushed further into the year, while a significant number of investors question the feasibility of rate hikes in the future. Traders anticipate a decline of 1.75% to 2.25% in the S&P 500 in this scenario.

The upcoming CPI reading is highly anticipated by investors as it has the potential to significantly impact the stock market. The market’s reaction will depend on the degree of inflation and how it aligns with expectations. While there is speculation about interest rate cuts, the exact timing and extent of these cuts remain uncertain. Investors and traders will closely watch the CPI reading to gauge potential shifts in market sentiment and adjust their strategies accordingly.

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