Impact of Latest Consumer Price Index on Stock Market

The upcoming consumer price index (CPI) reading holds significant importance for the stock market, as it has the potential to influence stock prices. According to traders from JPMorgan, the CPI for January is expected to continue the trend of easing inflation. The decline in inflation rates could lead to a positive market response, while a stronger-than-anticipated reading may impact stocks negatively. This article delves into the various possible outcomes of the CPI reading and their potential ramifications on the stock market.

Economists surveyed by Dow Jones predict a 0.2% increase in the January CPI compared to the previous month, with a 2.9% rise from the same period last year. These estimates reflect a decrease from December’s figures of 0.3% and 3.4% respectively. The core CPI, which excludes food and energy prices, is also projected to remain stable or experience a slight decline. Consensus estimates suggest a 0.3% increase on a monthly basis and a 3.7% rise from the previous year. These figures indicate a minor decrease from December’s gains of 0.3% and 3.9% for the corresponding periods.

Investors have been closely monitoring inflation trends, hoping for a downward trajectory, as this would allow the Federal Reserve to consider interest rate cuts. A stronger-than-expected CPI reading could potentially hinder the likelihood of rate cuts, resulting in a negative impact on stocks. Conversely, a cooler reading could drive equity prices higher.

JPMorgan’s U.S. market intelligence group has outlined five potential scenarios for the S&P 500 index based on variations in the month-over-month core CPI reading.

Scenario 1: Disinflation Firmly Entrenched (45% Chance)

If the CPI rises between 0.2% and 0.3%, it could signify a solidification of disinflation, aligning with Fed Chair Jerome Powell’s desire for positive inflation data. In this scenario, JPMorgan traders anticipate a 0.5% to 1% increase in the S&P 500.

Scenario 2: Boosting Demand for Longer Duration Bonds (25% Chance)

A CPI increase between 0.1% and 0.2% may enhance demand for longer duration bonds and bolster sectors that have been underperforming. This outcome could result in a 1% to 1.5% gain for the S&P 500.

Scenario 3: Worries about Stickier Core Inflation (22.5% Chance)

If the core CPI reading falls within 0.3% to 0.4%, concerns about core inflation being stickier than anticipated could arise. Traders would focus on the differences between core goods and core services, paying attention to any impact from conflicts in the Red Sea on the supply chain. Consequently, JPMorgan traders forecast a 1% to 1.5% decline in the S&P 500.

Scenario 4: Collapse in Bond Yields (5% Chance)

Should the CPI outcome be below 0.1%, potentially due to a weaker-than-expected increase in housing prices, bond yields could collapse. This could trigger an “everything rally” in stocks and push expectations of a rate cut in March above 50%. In this scenario, the S&P 500 may rally by 2% to 2.25%.

Scenario 5: Hotter-Than-Expected Inflation (2.5% Chance)

If the CPI reading exceeds 0.4%, it would likely have a significant effect on Treasury yields, leading to a delay in rate cut expectations. Additionally, a substantial number of investors may question whether rate hikes are still possible this year. Traders anticipate a potential 1.75% to 2.25% decline in the S&P 500 in this scenario.

The upcoming consumer price index reading holds crucial implications for the stock market. A lower inflation rate is generally favorable for equities, as it increases the likelihood of interest rate cuts. However, unexpected CPI outcomes can significantly impact investor sentiment and stock prices. The varied scenarios presented by JPMorgan traders provide insight into the potential effects on the S&P 500 based on different CPI readings. Traders and investors will closely scrutinize the results to gauge the direction of the market and adjust their strategies accordingly.


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