The consumer price index (CPI) report expected on Friday is poised to significantly influence the direction of major stock averages after a week marked by volatility. According to insights from JPMorgan’s trading desk, the markets have faced turbulence as investors are increasingly shifting their focus away from technology stocks and leaning towards cyclical sectors. Current performance indicates that the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average are all tracking towards weekly losses.
Analysts surveyed by Dow Jones predict that the core consumer price index for January, which excludes the often erratic food and energy prices, is anticipated to rise by 0.3% on a month-over-month basis. Furthermore, they forecast a year-over-year increase of 2.5% for core CPI. In a detailed note released Thursday, JPMorgan’s trading desk presented various scenarios regarding the upcoming CPI data, highlighting how each could potentially affect stock movements.
Michael Feroli, the chief U.S. economist at JPMorgan, has made his own projections, estimating that the core CPI will rise by 0.39% monthly and climb to 2.6% annually. This particular CPI reading gains importance given recent economic indicators, including flat retail sales in December and notable labor market data. JPMorgan emphasized that even though this week’s data releases might suggest a balanced or “Goldilocks” economic environment, there remains a possibility of a stagflation reading, which could impact market sentiment negatively.
The trading desk elaborated on the implications of various outcomes for the CPI readings, expressing consensus that a more hawkish economic print is likely than a dovish one. However, they believe that the market may not react strongly to a stagflationary print, noting that cyclical sectors and staples might see sell-offs, while investors may shift their focus back to growth opportunities in sectors such as large-cap technology and healthcare.
JPMorgan’s scenarios regarding the CPI release include varying probabilities of outcomes and their potential implications for the S&P 500:
– If the core CPI rises above 0.45%, with a 5% probability, the S&P 500 could decline between 1.25% and 2.5%.
– A core CPI increase between 0.4% and 0.45%, deemed to have a 25% chance, might lead to fluctuations in the S&P 500, potentially resulting in a loss of 0.75% to a gain of 0.25%.
– A reading between 0.35% and 0.4% holds a 42.5% probability and could see the S&P 500 rise by around 0.25% to 0.75%.
– If the core CPI lies between 0.3% and 0.35%, which has a 22.5% chance, the S&P 500 could increase by 1% to 1.5%.
– A core CPI print below 0.3%, with a 5% probability, may result in gains for the S&P of 1.25% to 1.75%.
Furthermore, options trading indicates that the market anticipates approximately a 1.1% movement in the S&P 500 on February 13, reflecting the unpredictable nature of the market as investors await the official CPI figures. As the week draws to a close, the forthcoming data could very well dictate the market’s performance as it navigates through these challenging economic circumstances.
