CPI data issued by the Bureau of Labor and Statistics has been a powerful force on equity markets this year, as the Federal Reserve continuously hikes interest rates to cool record inflation.
In fact, if inflation numbers come out soft on Tuesday, the sales and trading desk at JPMorgan is forecasting a 10% rally in the S&P 500 SPY.
What Happened: According to Andrew Tyler of JPMorgan, an annualized inflation print of 6.9% or lower would trigger such a rally, which could raise the benchmark index by 8% to 10%.
If that move occurs, it would launch the index securely above the 20% bear market zone, as the S&P 500 would be down 6.66% year to date, versus 16.6%.
However, Tyler’s team estimates that the likelihood of that happening is only about 5%.
|November CPI reading||Probability||S&P 500 reaction|
|7.8% or higher||5%||Down 4.5% to 5%|
|7.5% to 7.7%||25%||Down 2.5% to 3.5%|
|7.2% to 7.4%||50%||Up 2% to 3%|
|7.0% to 7.2%||15%||Up 4% to 5%|
|6.9% or lower||5%||Up 8% to 10%|
The team predicts that a CPI reading between 7.2% and 7.4%, with a 2%–3% increase in the S&P 500, is the most likely outcome.
Why It Matters: The index has managed to remain above the 100-day moving average, but dropped below its 200-day moving average this month, a much-observed trend line.
“The CPI print has the potential to dictate market direction and magnitude until earnings kick off in mid-January,” Tyler said. “Equity positioning is less light but remains historically low; investors seem to have a view that this report comes inline or slightly dovish.”
On the other hand, any value near or over the previous reading of 7.7% could be concerning. If inflation rises above 7.8%, the equities index might fall as much as 5%, according to JPMorgan’s analysis.
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