In its latest report released on Monday, Bank of America pointed out that market concerns about inflation have slightly eased recently, but the impact of the November CPI data scheduled to be released on Wednesday on the US stock market will exceed investors' expectations.
At present, the market generally expects the inflation rate to rebound in November, rising from 2.6% last month to 2.7%. The core CPI is expected to remain in the range of 3.2% to 3.3%.
A strategist from Bank of America stated that the impact of this inflation report on the US stock market may be particularly evident, following months of lackluster market response to CPI data. The bank stated that before the latest inflation data is released, option pricing implies a ± 0.64% fluctuation in the S&P 500 index on Wednesday, which will also be the smallest CPI related fluctuation since inflation began to rise in 2021.
Strategists also mentioned the Bloomberg Inflation Surprise Index, which shows that the latest inflation data may have the biggest unexpected increase in CPI since May.
In this context, we believe that the remaining two major events of this year (CPI and FOMC) can determine the short-term direction of the market
Weaker data can clear the way for a rebound at the end of the year. The second half of December is the second strongest period for Chinese and American stocks in a year, with an average increase of 1%. On the contrary, stronger data may reshape volatility, especially after the 5% rebound after the election, "strategists added.
More importantly, the latest inflation data will affect the Federal Reserve's next interest rate decision. An unexpected upward trend may increase the likelihood that the Federal Reserve will pause its interest rate cut cycle earlier than market expectations.
Bank of America stated, "We believe that the CPI data will be weak enough to confirm the December rate cut
According to data from the CME Federal Reserve Observation Tool, as of press time, the market expects the probability of the Fed cutting interest rates again at next week's meeting to be as high as 85.8%.
Morgan Stanley also maintained its forecast for a 25 basis point rate cut by the Federal Reserve next week, following the release of new non farm payroll data in the United States last Friday. The bank believes that the data reflects that the labor market remains strong, but there are slight signs of cooling, reflected by a decrease in the proportion of employed population and labor force participation rate. In addition, Macquarie, Dutch Bank, and Wells Fargo also maintained their forecast for the Federal Reserve to cut interest rates by 25 basis points next week.
However, it will not be so certain by January next year. Investors believe that the possibility of another interest rate cut in January next year has dropped to around 22%, while the possibility of keeping the interest rate unchanged is 67.5%.
In summary, strategists believe that the US CPI data will provide important clues for future market trends, and investors need to be cautious and adjust their strategies in a timely manner to adapt to the constantly changing market environment.