Wall Street is eagerly anticipating the consumer price index report set to release on Wednesday, which could offer important clues about the state of the economy. Investors are on edge about inflation, and this CPI report has the potential to significantly sway the market in either direction. The data is expected to drop at 8:30 a.m., and Dow Jones economists have predicted the headline inflation rate to have risen by 0.3% month-over-month in January and 2.9% compared to the previous year. They also forecast core inflation—which leaves out the more unpredictable food and energy prices—to have increased by 0.3% from the last month and 3.1% year-over-year. Should the core CPI meet these expectations, it would represent the lowest levels since April 2021.
This report arrives at a time when traders are concerned about President Donald Trump’s tariff escalations with major trading partners like Mexico, Canada, and China, potentially pushing inflation upwards. Keeping this context in mind, JPMorgan traders have shared their outlook on how the S&P 500 might react post-release. Here’s a breakdown of possible scenarios based on different month-over-month core CPI outcomes:
A rise of 0.4% or higher (5% probability): JPMorgan foresees the S&P 500 falling between 1.5% and 2% in this scenario. The significant uptick in inflation could be driven by climbing shelter prices, alongside deflationary core goods like medical expenses and alcohol turning inflationary. Treasury yields would likely show a strong reaction, as this scenario hints at a potential interest rate hike at the Federal Reserve’s upcoming meeting.
An increase between 0.33% and 0.39% (25% probability): JPMorgan predicts a drop of 0.75% to 1.5% for the broad market index. While this would not have a major impact on the bond market, equities might feel the pinch. According to the bank, “This reading is unlikely to completely eliminate all cut expectations for FY25, but it may cause the implied probabilities to be evenly split on whether a cut will occur in FY25.”
A gain between 0.27% and 0.33% (40% probability): Under this standard scenario, Treasury yields would likely remain stable. The S&P 500 is anticipated to fluctuate between a 0.25% decline and a 1% rise. “Though the upper range isn’t exactly a Goldilocks scenario, the market’s resilience year-to-date might push stocks higher, particularly led by small-cap stocks,” the traders suggest.
A rise between 0.21% and 0.27% (25% probability): JPMorgan traders call this outcome a “Goldilocks” situation for the market, estimating the S&P 500 would increase by 1% to 1.5%.
A gain of 0.2% or less (5% probability): A core CPI reading lower than expected could lift the S&P 500 by 1.25% to 1.75%, according to JPMorgan. This could also weaken the dollar, potentially benefiting emerging markets, the traders noted.
