What to Focus On Ahead of CPI Report Amid Persistent Inflation Concerns

Options Newsman wrote a column · May 14 05:45

Wall Street started the week with caution as traders prepared for important inflation data, which is expected to influence Federal Reserve policy and the direction of global markets.

Ahead of the upcoming consumer price index (CPI) report, there were minor fluctuations in stocks, bonds, and the dollar. The CPI is likely to indicate some reduction in inflation, but levels are anticipated to remain high enough to prevent interest rate cuts. A survey from the Fed Bank of New York also pointed to rising inflation expectations. Trading experts are suggesting that investors should be ready for potential volatility in the stock market.

The key risk is a hotter CPI print," said Andrew Tyler at JPMorgan Chase & Co. "But upcoming macro data creates a two-tailed risk — with one tied to stronger-than-expected growth fueling inflation concerns and the other being weaker growth fueling either recession or 'stagflation' concerns."

Source: Bureau of Labor Statistics, Bloomberg

What Options Market Indicates

The options market predicts a 1% swing in the $S&P 500 Index(.SPX.US)$ following the release of the CPI data, as noted by Andrew Tyler.

Source: JPMorgan

Yields 23,000% Return vs. 66% When Missed

Since the 1930s, investors who failed to capture the top 10 performing days of each decade for the benchmark index would have seen a 66% return, which is significantly less compared to the approximately 23,000% return they could have achieved by remaining invested during those peak days, as per Bank of America's data. Furthermore, the analysis indicated that these optimal days often followed the market's worst periods, times when the urge to sell might have been strongest.

Source: BofA

Analysts' Take

• Goldman Sachs 's Scott Rubner has indicated that US stocks and bonds may experience potential gains this week, as traders continue to increase their long positions. There is a significant demand for equities and fixed-income assets from commodity trading advisors, with positive signals, referred to as a "green sweep," appearing in most of Goldman's predictive models. This suggests that investors are likely to continue buying more, even if the market declines.

• Chris Larkin from Morgan Stanley pointed out that crucial inflation figures are being released at a time when a three-week surge has brought the S&P 500 close to reaching its all-time high levels.

An extension of the rally could depend on whether investors still feel positive about rate cuts after this week's numbers.“

• "Squeeze risks for rate-sensitive laggards on a CPI miss outweigh downside risks on a CPI beat," said Ohsung Kwon at Bank of America Corp.

With further hikes ruled out, we think equities may be able to tolerate higher inflation."

• Barry Bannister from Stifel Nicolaus & Co. anticipates that a halt in the advancement against inflation is likely to cause a downturn in US stock markets in the upcoming months. He pointed out that there could be an estimated 10% fall in the S&P 500 during the second or third quarter, bringing it down to approximately 4,750.

• Matt Maley from Miller Tabak + Co. has observed that the stock market is currently positioned at a pivotal point. He notes that after a significant drop in April, equities experienced a substantial recovery, which now leaves them susceptible to forming a "double top" — a pattern that technical analysts consider to be a strong bearish indicator.

• Marko Kolanovic from JPMorgan suggests that the current high interest rates, diminishing economic growth, and limited prospective returns make it challenging to make a case for investing in stocks at this time.

We don't see enough of a return to warrant taking on equity risk at this juncture. The macro outlook is uncertain and for equities, we are entering into a seasonally tricky time of the year, with a challenging combination of inflation at risk of staying too high, profit margin pressures, and elevated positioning."

• Ben Snider, a senior strategist on Goldman's US portfolio strategy team, mentioned in an interview that despite the S&P 500 currently exceeding Goldman's year-end target of 5,200, the underlying fundamentals for stock prices are still "very good." He is positive about the future of stocks due to robust earnings reported by US companies and his belief in a steady trend of decreasing inflation.