A 10% pop in the S&P 500 Tuesday? What JPMorgan's trading desk note on CPI really says

Published Tue, Dec 13 20227:28 AM EST

A note from JPMorgan's sales and trading desk made the rounds Monday on Wall Street and may have had a hand in the Dow Jones Industrial Average 's 500-point gain by the end of the day. The note gave out market-reaction scenarios based on what Tuesday's all-important consumer price index shows and suggested investors were betting on a lighter-than-expected reading. Currently, economists polled by Dow Jones expect CPI to come in up 7.3% year over year for November and 0.3% higher versus the prior month. The trading desk note from JPMorgan — which was sent early in the morning but didn't seem to gain traction with traders until later in the day — noted that the S & P 500 rallied 5.5% in a single day last month when the previous CPI report came in lighter than expected. "Investors seem to have a view that this report comes inline or slightly dovish," the note said. "This dovish view appears to be driven by the recent decline in commodity prices and high-frequency data coming showing accelerating disinflation, e.g., used car prices." The note then gave the following scenarios: 5% probability — CPI 7.8% or higher — S & P 500 down 4% to 5% 25% probability — CPI 7.5% - 7.7% — S & P 500 down 2.5% to 3.5% 50% probability — CPI 7.2% - 7.4%. — S & P 500 up 2% to 3% 15% probability — CPI 7.0% - 7.2% — "A bullish outcome that could pull terminal rate lower." — S & P 500 up 4% to 5% 5% probability — CPI 6.9% or lower — "A print here could be the technical end of the bear market...This would give increasing confidence in projections of headline inflation falling [to] 3% in 2023. Further, if inflation is at 3%, irrespective of the labor market conditions, it seems unlikely that the Fed would hold the terminal rate at 5%. Any Fed pivot will rip equities." — S & P 500 up 8% to 10% It's that last scenario that turned heads, even with just a 5% probability assigned. JPMorgan reiterated these scenarios again in its note Tuesday and noted that the derivatives markets are pricing in "a larger impact from CPI" than from the Federal Reserve rate decision Wednesday. — With reporting by Michael Bloom