Investors should expect a 5% sell-off in the stock market on Thursday if CPI comes in above 8.3%, JPMorgan says

  • Thursday’s CPI reading could spark a 5% sell-off in the stock market, according to JPMorgan.
  • That’s if the inflation measurement comes in above 8.3%, which would be ahead of consensus estimates for an 8.1% reading.
  • Alternatively, a CPI print below 7.9% could spark a 3% rally and bolster calls for a Fed pivot.

Investors should be prepared for a steep stock market decline on Thursday if the highly anticipated September Consumer Price Index reading comes in above 8.3%, JPMorgan’s trading desk said on Monday.

The bank expects the stock market to sell-off by 5% if the inflation gauge shows a re-acceleration relative to August’s 8.3% reading, as it would bolster the Fed’s call that it needs to continue to hike interest rates to tame inflation.

“This feels like another -5% day,” JPMorgan’s Andrew Tyler said, referencing last month’s 4.3% decline in the S&P 500 after CPI came in at 8.3%, ahead of consensus estimates for 8.1%.

While the Fed is widely expected to hike interest rate by another 75 basis points at its upcoming FOMC meeting on November 2, its following two meetings lack consensus and this Thursday’s CPI inflation could determine whether the Fed continues with its aggressive rate hikes after November 2, or if a slow-down in rate hikes is appropriate.

According to Bloomberg, consensus estimates suggest a CPI print of 8.1% on Thursday, which would represent a continued deceleration in price increases from the peak of 9.1% reached in June.

Tyler expects a CPI print of 8.1% to 8.3% in September to also be negative for the stock market, estimating that the S&P 500 would fall about 2% on Thursday in that scenario. “The bigger concern here is the bond market repricing to increase the probability of a 75 basis point hike in December,” Tyler said.

The combination of a high September CPI reading, poor third-quarter earnings results, and an exogenous shock to oil prices could send the S&P 500 to 3,300, representing potential downside of 9% from current levels, according to the note. 

Conversely, any CPI readings below 8.1% could spark some big gains for the stock market. Specifically, a CPI print below 7.9% would likely generate a 2%-3% rally on Thursday, “though if we see CPI gap down more than 60 basis points the move could be larger,” Tyler said.

That’s because such a slowdown in inflation would bolster the view that the Fed could soon pivot away from its aggressive interest rate hikes as inflation clearly shows signs of decelerating. It would also open the door for a renewed view among investors that a soft landing of the economy is possible.

The scenario of a dovish CPI print, combined with upside earnings surprises could get the S&P 500 back on track to test the 4,000 level, representing potential upside of 11%. 

“I think anything under 7.8% is enough to trigger a move towards 4,000 as it would likely be interpreted as official inflation measures catching up to some of the higher frequency measures and setting the stage for more dovish surprises. Further, you could see the bond market begin to remove its 2023 rate hike,” Tyler said.

Whatever the CPI print on Thursday, investors should be prepared for one thing according to JPMorgan’s Jamie Dimon: more volatility. The CEO said Monday that the US is headed for a recession in six to nine months that could wipe away another 20% of the stock market’s value. 

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