As the US stock market continues to rise, JPMorgan Chase's trading department has issued a warning that investors should be prepared for a new round of turbulence as heavyweight data hits this Thursday.
This Thursday, the United States will release its heavyweight Consumer Price Index (CPI), which is crucial for the future prospects of the Federal Reserve's interest rate cuts. Andrew Tyler, the head of US market intelligence at JPMorgan Chase, said that the data could trigger severe volatility in the US stock market.
Xiaomo rehearsed four possible scenarios
In May of this year, the US core CPI rose by 0.16% month on month, the lowest level since August 2021. Federal Reserve officials typically believe that a core CPI that excludes volatile food and energy components is a better indicator of inflation compared to CPI.
JPMorgan Chase predicts that the US core CPI will rise by 0.2% month on month in June. Based on this prediction, Taylor deduced four possible scenarios:
① If the core CPI of the United States rises by more than 0.3% month on month in June, it means that inflation is making a comeback and the possibility of the Federal Reserve cutting interest rates is weakened. This may trigger a sell-off of risky assets, with the S&P 500 index falling by 1.25% to 2.5% - but he believes that the likelihood of this happening is only 2.5%.
② If the month on month increase in core CPI in the United States is between 0.15% and 0.20% - this is also the most likely scenario that Taylor's team believes to occur. In this scenario, the S&P 500 index is expected to rise by 0.5% to 1%.
③ If the core CPI of the United States rises between 0.20% and 0.25% month on month, the US stock market may initially have a negative reaction, but a decline in bond yields will ultimately support the stock market, driving the S&P 500 index up 0.25% to 0.75%.
④ The most optimistic scenario is that the core CPI of the United States rose below 0.1% month on month in June, which will be extremely beneficial for the US stock market. It may even prompt some people to call for early interest rate cuts in July, and may drive the S&P 500 index up 1% to 1.75%.
The Taylor team wrote in the report, "Several Federal Reserve officials have hinted that a rate cut in September is appropriate... Considering this, we remain tactical bullish on US stocks, but confidence has slightly declined."
"The tranquility before the storm"
Before the CPI report was released, the market was currently in a "pre storm calm": the volatility index (VIX) of the Chicago Board of Options Exchange is currently trading around 12, approaching a 52 week low. Usually, it is only when the VIX index reaches 20 that traders begin to worry.
VIX index trend over the past six months
In addition, Federal Reserve observation tools show that the market expects a probability of approximately 70% for the Fed to cut interest rates in September.
Taylor wrote in the report, "The further cooling of the US core CPI data will be a positive signal for the market, which may make the call for a rate cut in September deafening."
He also mentioned that a key indicator that investors need to pay attention to is the decline in US housing prices.
He mentioned, "A key question is whether the decline in US CPI is attributed to the decline in housing prices, as housing prices have always been an important source of stickiness in US CPI. If there is any substantial decrease in this data, it will be welcomed by the market, which may indicate further inflation cooling in the future."