Macro
Wall Street braces for 1.3%-1.4% S&P 500 move as CPI and Fed decision coincide on Wednesday.
Wall Street's major trading desks, including those at JPMorgan Chase & Co. and Citigroup Inc., are preparing for significant market movements this week, driven by the latest inflation data and the Federal Reserve's interest-rate decision, both scheduled for Wednesday. The options market is currently pricing in a 1.3% to 1.4% move in either direction for the S&P 500 Index by Friday, based on at-the-money straddles expiring that day, according to Andrew Tyler, head of US market intelligence at JPMorgan Chase.
“With CPI and Fed on the same day, there is a possibility of a CPI outcome being reversed by Powell’s press conference,” Tyler and his team noted in a client memo. This sentiment is echoed by Citigroup’s head of US equity trading strategy, Stuart Kaiser, who highlighted that investors are gearing up for the largest Fed day stock-market move since March 2023.
JPMorgan's trading desk has mapped out several scenarios for the S&P 500's reaction to the core Consumer Price Index (CPI) data. If the month-over-month core CPI exceeds 0.4%, a broad selloff in risk assets is expected, with the S&P 500 potentially dropping between 1.5% to 2.5%. However, Tyler assigns just a 5% probability to this outcome. The forecast for May’s core CPI is a 0.3% increase from the previous month.
In the most likely scenario, where core CPI rises between 0.3% and 0.35%, the S&P 500 could see a movement ranging from a 0.75% loss to a 0.75% gain, influenced by factors such as shelter disinflation and price increases in vehicles and medical services. A core CPI increase of 0.20% to 0.25% would likely boost expectations for a rate cut in September, with some traders even betting on a July cut following the European Central Bank's recent rate reduction.
Should the core CPI come in below 0.2%, it would be considered a substantial positive for equities, potentially sparking a rally of 1.75% to 2.50% in the S&P 500, according to Tyler.
The potential for significant market swings around the CPI report and Fed decision comes amid historically low volatility levels. The Cboe Volatility Index (VIX) is trading near a 52-week low at 13, far below the 20 level that typically raises concerns among traders. Despite this, recent US job growth data, which showed nonfarm payrolls advancing by 272,000 in May, has prompted traders to push back the expected timing of rate cuts.
Stuart Kaiser of Citigroup noted that the options market is betting on a 1.25% move in either direction for the S&P 500 on Wednesday, marking the largest implied swing ahead of a Fed decision since March 2023. “Over the past year, the markets have largely priced CPI and Fed days similarly at 0.75% each on average, so doubling them up makes it a bigger event and raises uncertainty around the event,” Kaiser explained.
Andrew Tyler, JPMorgan Chase (Neutral on the S&P 500):
"With CPI and Fed on the same day there is a possibility of a CPI outcome being reversed by Powell’s press conference."
Stuart Kaiser, Citigroup (Bearish on risk assets if core CPI tops 0.4%):
"If month-over-month core CPI tops 0.4%, that would likely spur a selloff across all risk assets, with the S&P 500 falling between 1.5% to 2.5%."
Andrew Tyler, JPMorgan Chase (Neutral on the S&P 500 for most likely scenario):
"If core CPI comes in between 0.3% and 0.35% from the prior month — the most likely scenario to JPMorgan’s trading desk — the S&P 500’s outcome ranges from a 0.75% loss to a 0.75% gain."
Andrew Tyler, JPMorgan Chase (Bullish on equities if core month-over-month CPI is below expectations):
"Anything below [core month-over-month] CPI of 0.2% will be considered a substantial positive for equities, sparking a rally of between 1.75% to 2.50% in the S&P 500."