Market watchers bracing for drop
Speculators fear Fed hike ahead of price index release
With a dovish Federal Reserve pivot in rate increases seemingly off the table after last week’s employment report, risks for speculators are running high before Thursday’s release of the U.S. consumer price index.
Anything above the yearover-year August reading of 8.3% marks big trouble for the stock market, according to JPMorgan Chase & Co.’s trading desk.
“This feels like another -5% day,” the team led by Andrew Tyler wrote in a note Monday, noting that the S&P 500 dropped 4.3% on Sept. 13, when August’s consumer inflation reading came in hotter than expected.
The scenario is the worst case laid out as a rough guide for clients seeking to navigate the heightened market volatility around economic data. JPMorgan economists led by Mike Feroli expect September’s consumer price index, or CPI, to decline to 8.1%, aligning with the median forecast of a Bloomberg survey.
If the data arrives in a range between 8.1% and 8.3%, the bank’s sales trading team sees a potential “buyer’s strike” where the S&P 500 slides 1.5% to 2%.
Unsurprisingly, data on inflation is exerting a huge influence on the stock market.
Plotting the S&P 500 performance against the top 10 economic indicators, such as monthly payrolls and quarterly gross domestic product, Barclays PLC strategists including Anshul Gupta and Stefano Pascale found that, over the past decade, never have stocks been so negatively reactive to an economic indicator as they are now to the CPI.
With the exception of the July CPI report — which showed inflation reached 8.5% compared with a year ago — the S&P 500 has fallen every time the data was released as consumer prices came in mostly hotter than expected.
The upcoming data is likely to set the future path of Fed tightening after recent market jitters.
Last week, the S&P 500 scored its best two-day really since April 2020 after weakening manufacturing stoked speculation for a less hawkish central bank, only to slump as a solid jobs report validated those who say thoughts of a Fed pivot are wishful.
“This week’s CPI will be the most important catalyst into the November 2 Fed meeting; 75 (basis points) feels like a foregone conclusion, but the following two meetings lack a consensus,” JPMorgan’s Tyler wrote Monday, adding that stronger inflation will prompt the bond market repricing to increase the probability of another significant rate increase in December.
On the flip side, the team said, any softening inflation is expected to spark an equity rally, where the S&P 500 is “most likely” to jump 2% to 3% if CPI print comes in below 7.9%.
The positive reaction can be more pronounced if CPI pulls back by an amount that exceeds the 60 basis points experienced in July. “Then calls for a Fed pause/pivot may become deafening,” the team wrote.