Macro

Trading CPI: JPMorgan Predicts S&P 500 Swing from -2.5% to +2.5%

JPMorgan sees 40% chance of CPI rising 0.3%-0.35%, S&P 500 moving -0.75% to +0.75%.

By Barry Stearns

6/11, 11:24 EDT
S&P 500
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Key Takeaway

  • JPMorgan traders predict a 40% chance of CPI rising 0.3%-0.35%, leading to S&P 500 movement between -0.75% and +0.75%.
  • A CPI increase of more than 0.4% has a 5% chance, potentially causing a significant S&P 500 sell-off of up to -2.5%.
  • Conversely, a CPI rise below 0.2% (2.5% chance) could trigger an S&P 500 rally between +1.75% and +2.5%.

CPI Report and Market Reactions

The upcoming May consumer price index (CPI) report is poised to be a significant market mover, with economists polled by Dow Jones expecting a 0.1% month-over-month increase and a 3.4% year-over-year rise. Core CPI, which excludes volatile food and energy prices, is forecasted to rise by 0.3% from the previous month and 3.5% year-over-year. This report is crucial as it will provide insights into the state of U.S. inflation and could spark volatility in the stock market ahead of the Federal Reserve's interest rate announcement.

JPMorgan has outlined six potential scenarios for the market's reaction to the CPI data. The most likely scenario, with a 40% chance, is a CPI increase of 0.3%-0.35%, which could result in the S&P 500 moving within a range of -0.75% to +0.75%. This scenario has the widest range of outcomes, reflecting both disinflationary trends and stickier inflation arguments. A 25% chance scenario, where CPI increases by 0.25%-0.3%, could see the S&P 500 gain 0.75%-1.25%, potentially reigniting the "Goldilocks" narrative of moderate growth and inflation.

Fed Decision and Market Volatility

The Federal Reserve's interest rate decision, also scheduled for Wednesday, adds another layer of complexity. The options market is betting on a 1.3% to 1.4% move in the S&P 500 by Friday, based on at-the-money straddles expiring that day, according to Andrew Tyler, head of US market intelligence at JPMorgan Chase. This would be the largest implied swing ahead of a Fed decision since March 2023, indicating heightened market sensitivity to both the CPI report and the Fed's announcement.

Stuart Kaiser, Citigroup's head of US equity trading strategy, noted that the markets have historically priced CPI and Fed days similarly at 0.75% each on average. However, the combination of both events on the same day raises uncertainty and potential volatility. "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 wrote in a note to clients.

Market Scenarios and Investment Strategies

JPMorgan's scenario analysis provides a detailed roadmap for potential market reactions. A 15% chance scenario, where CPI grows by 0.35%-0.4%, could lead to a 1%-1.25% pullback in the S&P 500, driven by lackluster disinflation in core goods and shelter. Conversely, a 12.5% chance scenario with a CPI rise of 0.2%-0.25% could see the S&P 500 jump 1.25%-1.75%, as expectations for a September rate cut surge.

The least likely scenarios include a 5% chance of CPI rising more than 0.4%, which could trigger a 1.5%-2.5% sell-off in the S&P 500, and a 2.5% chance of CPI rising less than 0.2%, potentially sparking a 1.75%-2.5% rally. These scenarios underscore the market's sensitivity to inflation data and the Fed's policy direction.

Street Views

  • JPMorgan Traders (Neutral on the market reaction to CPI data):

    "This scenario has the widest range of outcomes since the low end of the range supports the disinflationary trend and the higher end of the range [supports] the stickier inflation argument."
    "The S&P 500 would gain 0.75%-1.25% under this outcome as it would likely restart the Goldilocks narrative."
    "Lackluster disinflation in core goods and shelter would lead to this outcome, decreasing the chances of a rate cut this year. The S&P 500 would pull back between 1% and 1.25% under this scenario."
    "The S&P 500 would jump 1.25% to 1.75% as September rate cut expectations surge."
    "Given the acceleration higher in inflation, rate cut bets for 2024 would evaporate and we will see the return of views of a rate hike."
    "The S&P 500 would rally 1.75%-2.5% as [a smaller-than-expected increase] would likely be fueled by a material decline in shelter inflation."