Trading CPI: How the stock market could react to Wednesday's inflation report

Published Tue, Apr 9 20241:08 PM EDTUpdated Tue, Apr 9 20241:41 PM EDT

The latest U.S. inflation data set for release Wednesday could spark a major move in stocks as investors deliberate how the Federal Reserve will proceed with interest rates, according to JPMorgan. The March consumer price index, due out Wednesday at 8:30 a.m. ET, is estimated to show an increase of 0.3% on a monthly basis and 3.4% year over year, according to economists polled by Dow Jones. Core CPI, which excludes volatile food and energy prices, is expected to rise 0.3% and 3.7%, respectively. How much the report deviates from projections could trigger a sizable equity move, according to the largest bank in the country. A hotter print could mean a pullback at a time when many worry that equities have run too far, too fast. On the other hand, a cooler print could cause an "accelerated equity move higher" by bolstering the likelihood of a June Fed rate cut. Given this, JPMorgan projected how the S & P 500 could trade on the basis of the core CPI reading, breaking out five possible scenarios. 10% chance of a print above 0.40% — A stronger-than-expected core CPI print could mean a meaningful pullback in equities, equal to a selloff in the range of 1.75% to 2.5%, according to JPMorgan. If the S & P 500 falls by more than 2%, it would be the first such decline in more than a year, since February 2023, the note read. Bond yields would surge. "The ultimate outcome may be a removal of all 2024 rate cut expectations with increased implied probability of rate hikes," JPMorgan said. 35% chance of a print between 0.30% and 0.40%, inclusive — An in-line to slightly hotter core reading could result in wide-ranging outcomes, depending on how well markets absorb the report. JPMorgan anticipates the S & P 500 could either advance a quarter percentage point, or lose as much as 1%. 37.5% chance of a print between 0.20% and 0.30%, inclusive — An in-line reading could mean the S & P 500 might add as much as a half percentage point, or fall by as much as 1%. However, JPMorgan anticipates investors will parse the report, specifically for signs of disinflation in housing costs. "While the commodity price spike certainly gives pause for its ability to filter to core prices, shelter remains one of the more stubborn aspects of core prices, and the heaviest weight," the Wall Street firm wrote. 15% chance of a print between 0.10% and 0.20%, inclusive — A cooler core inflation print, posting downside surprises across multiple segments including transportation and apparel, would mean the S & P 500 could rally between 1.25% and 1.75%. Bond yields would drop. Expectations of a June rate cut will rise. "This would be supportive of Equities, specifically Cyclicals/Value, as part of an 'Everything Rally,'" the note read. 2.5% chance below 0.10% — A downside surprise in core inflation could spark a rally in the S & P 500 in the range of 1.5% and 2%. "Bond yields would see significant decline with the 10Y yield falling 20bps, or more, as investors potentially carry that momentum to push the 10Y yield below 4% in the succeeding days," read the note. "A downward surprise of this magnitude should fully green light a June cut."