Macro
CPI report and Fed meeting on Wednesday could cause S&P 500 to swing by up to 2.5%.
Wednesday is set to be a pivotal day for the U.S. economy, with two major events that could significantly impact financial markets. The day begins with the release of the Consumer Price Index (CPI) for May at 8:30 a.m. ET, followed by the Federal Reserve's policy meeting in the afternoon. UBS economist Jonathan Pingle aptly described the day as packing "months of macro risk into one day." The CPI report, combined with last Friday’s strong nonfarm payrolls data, is expected to influence the Fed's outlook on inflation, economic growth, and interest rates.
The CPI report is anticipated to show minimal month-over-month movement, with a projected 0.1% increase from April, translating to an annual rise of 3.4%. Excluding food and energy prices, the core CPI is expected to show a 0.3% monthly gain and a 3.5% annual rate. These figures are not dramatically different from April's readings but still indicate inflation running above the Fed’s 2% target. Jack Janasiewicz, lead portfolio strategist at Natixis Investment Managers, expects "very little fireworks" from the CPI report, predicting rather benign outcomes.
Despite the focus on CPI, it is not the primary metric used by the Fed, which prefers the Commerce Department’s measure of personal consumption expenditures prices. Nonetheless, the CPI report will be closely watched for signs that inflation is trending in the right direction, albeit incrementally.
While the Bureau of Labor Statistics releases the CPI report, the Federal Open Market Committee (FOMC) will be finalizing its projections for inflation, GDP, and unemployment. Market consensus suggests that the Fed will keep its benchmark overnight borrowing rate unchanged, within the range of 5.25%-5.50%. However, the Fed is expected to adjust its "dot plot," likely indicating fewer than the three interest rate cuts previously projected for 2024.
Goldman Sachs economists anticipate two rate cuts, with the first in September, while Bank of America expects one, and Citigroup foresees a possible three cuts. The Fed is also expected to lower its GDP growth outlook and raise its inflation projections. Chair Jerome Powell’s post-meeting press conference will be crucial for market participants seeking clarity on the Fed's future actions.
The dual release of the CPI report and the Fed's rate decision is expected to create significant market volatility. The options market is betting on a 1.25% move in either direction for the S&P 500 Index, the largest implied swing ahead of a Fed decision since March 2023. Stuart Kaiser, Citigroup’s head of US equity trading strategy, noted that the S&P 500 moved 0.8% on average following each event in the past year.
JPMorgan Chase’s trading desk has mapped out various scenarios for the stock market based on the CPI report. If the core CPI exceeds 0.4% month-over-month, a selloff across risk assets is likely, with the S&P 500 potentially falling between 1.5% to 2.5%. Conversely, a core CPI below 0.2% could spark a rally of 1.75% to 2.50% in the S&P 500.
Jonathan Pingle, UBS (Neutral on the economic outlook):
"The day packs months of macro risk into one day."
Jack Janasiewicz, Natixis Investment Managers (Cautiously Optimistic on CPI and Fed outcomes):
"While both typically have proven to be market-moving events, we expect very little fireworks from both releases given our expectations for rather benign outcomes."
"On the inflation front, expect more of the same – continued evidence that the broader disinflationary trend is still intact and that the stickier first quarter data was simply a pause in a downtrend."
David Mericle, Goldman Sachs (Neutral on Fed rate cuts):
"Our conviction remains limited because we continue to see cuts as optional, the inflation news we expect would make a decision to cut reasonable but not obvious, and FOMC participants have a range of views."
"We do not expect any significant changes to the FOMC statement or Chair Powell’s message at the June meeting. The most notable theme of Powell’s last press conference in May was his pushback against possible rate hikes, but talk of hikes has died down in markets since then."
Nicholas Colas, DataTrek Research (Bearish on wage growth impact):
"A still-growing U.S. economy is keeping wage growth stubbornly above the Fed’s unofficial target of 3.3 percent... Unless economic growth cools, it is hard to see a pathway to anything more than a token Fed rate cut in 2024."