Fed decision trade: What JPMorgan traders see the market doing, based on these scenarios

Published Wed, Jul 26 202310:12 AM EDTUpdated Wed, Jul 26 202311:39 AM EDT

Wall Street is eagerly awaiting the latest Federal Reserve decision, as traders weigh whether the market's stunning rally this year can continue. The central bank is largely expected to raise rates by a quarter point. According to the CME Group's FedWatch tool, traders are pricing in a 99% probability of rates going up by 25 basis points to a range of 5.25%-5.50%. That said, comments from Fed Chair Jerome Powell could sway the market one way or another, depending on whether he signals more rate hikes are ahead — or if the central bank is close to ending its tightening campaign. Against this backdrop, traders at JPMorgan laid out four scenarios for how the market might react, depending on what the Fed does and signals for the future: 65% chance — hike and pause: The S & P 500 would rise between 0.5%-0.75% under this scenario. "The softer-than-expected June CPI and PPI gave the Fed more comfort to be patient after the May hike leading to June's 'Hawkish Skip;' but whether we will see Fed hike again in 2023 is data dependent. This a reconfiguration of CPI that should affect prints beginning in October," JPMorgan traders wrote. 33%-34% chance — hike and continue: Under this outcome, the Fed would raise rates and signal that further tightening is ahead. Right now, the market sees only about a 30% chance of one more rate hike this year, JPMorgan traders said. "What kind of data would induce more hikes? Core CPI MoM printed 0.4% and 0.2% in June and May; if we see core inflation revert higher from prior levels, we may see Fed continue to tighten," they said. The S & P 500 would fall 0.5%-1% under this scenario. 1%-2% chance — hawkish skip: The S & P 500 would rally under this outcome, JPMorgan said. This signals that "inflation has fallen far enough, fast enough to warrant seeing if there are any additional moves ahead of the September 20 meeting." That said, "recent Fedspeak seems to be more anchored on what happened in the 1970s and not repeating those mistakes than [the] current situation," they said. Less than 1% chance — Fed signals tightening campaign ended in May. "Another tail-risk event which would catch virtually all investors off-guard and would presumably remove the near-term bear case for Equities. The outcome would be similar to the Hawkish Skip but of larger magnitude," the traders said. The Fed is slated to announce its latest decision at 2 p.m. ET. Powell is expected to hold a news conference at 2:30 p.m. ET. — CNBC's Michael Bloom contributed reporting.