JPMorgan Warns of a Shock to Stock Market’s Calm From CPI, Fed

Jun 10, 2024

(Bloomberg) — Wall Street’s most prominent trading desks from JPMorgan Chase & Co. to Citigroup Inc. are urging investors prepare for a stock market jolt this week after the latest inflation print and the Federal Reserve’s interest-rate decision, both of which arrive on Wednesday.

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The options market is betting the S&P 500 Index will move 1.3% to 1.4% in either direction by Friday, based on the price of at-the-money straddles that expire that day, according to Andrew Tyler, head of US market Intelligence on JPMorgan Chase’s trading desk. This would come in the wake of the consumer price index report Wednesday and the Federal Reserve’s interest-rate decision that afternoon.

“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 on Monday.

Meanwhile, investors are preparing for a Fed day stock-market move that would be the largest since March 2023, according to Stuart Kaiser, Citigroup’s head of US equity trading strategy.

If month-over-month core CPI tops 0.4%, that would likely spur a selloff across all risk assets, with the S&P 500 falling between 1.5% to 2.5%, according to Tyler. But he sees just a 5% chance of that happening.

The forecast for May’s core CPI, which strips out the volatile food and energy components and is seen as a better underlying indicator than the headline measure, is projected to rise 0.3% from a month earlier.

If core CPI comes in between 0.3% and 0.35% from the prior month — the most likely scenario to JPMorgan’s trading desk — the S&P 500’s outcome ranges from a 0.75% loss to a 0.75% gain, depending on shelter disinflation, along with increases in vehicle and medical prices, Tyler wrote.

If core month-over-month CPI comes in between 0.20% to 0.25% there would likely be a surge in September rate-cut expectations, according to Tyler. Some traders would even bet on July for “surprise, insurance” after the European Central Bank trimmed borrowing costs last week for the first time in five years, he explained.

Anything below 0.2% will be considered a substantial positive for equities, sparking a rally of between 1.75% to 2.50% in the S&P 500, he added.

The potential for a large swing around the CPI report and Fed decision comes as volatility across markets has been historically restrained. The the Cboe Volatility Index, or VIX, is trading near a 52-week low and at 13 is far from the 20 level that starts to raise concerns for traders.

Of note, US job growth soared in May, prompting traders to push back the expected timing of rate cuts when the figures were reported last week.

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