Stock market volatility expected ahead of CPI report

JPMorgan's Andrew Tyler warns of potential stock market swings with upcoming CPI data and Fed decision

Stock market volatility expected ahead of CPI report

Investors should brace for stock market volatility this week after a lengthy period of calm, as warned by JPMorgan Chase & Co.’s trading desk, reported BNN Bloomberg.

The options market is betting the S&P 500 Index will move by 0.9 percent in either direction by Thursday, based on the price of at-the-money straddles expiring that day, according to Andrew Tyler, the trading desk’s head of US market intelligence.

The latest consumer price index will be reported prior to that session, potentially triggering a move with traders betting on easing inflation driving the US Federal Reserve to cut interest rates twice in 2024.

“We have had multiple former Fed governors suggest that September is appropriate for a cut,” Tyler and his team wrote in a note to clients on Tuesday. “With this in mind, we remain tactically bullish, but with slightly less conviction.”

Central bankers typically see the core CPI reading, which strips out the volatile food and energy components, as a better underlying indicator of inflation than the headline measure. In May, core CPI climbed 0.16 percent from a month prior, the softest since August 2021.

The forecast for June’s core CPI is a rise of 0.2 percent from a month earlier. If it tops 0.3 percent, that would likely spur a selloff across risk assets, with the S&P 500 falling between 1.25 percent to 2.5 percent, according to Tyler. He sees just a 2.5 percent chance of that happening.

If core CPI comes in between 0.15 percent and 0.20 percent from the prior month, the most likely scenario to JPMorgan’s trading desk, the S&P 500 is expected to rise 0.5 percent to 1 percent, Tyler wrote.

If it comes in between 0.20 percent to 0.25 percent, there may initially be a negative reaction in equities, but falling bond yields will ultimately support stocks, sending the S&P 500 up between 0.25 percent and 0.75 percent, according to Tyler.

Anything below 0.1 percent will be considered extremely positive for equities, likely pulling forward some calls for a July rate cut and sparking a rally of between 1 percent to 1.75 percent in the S&P 500, he added.

The potential for a large swing around the CPI report and Fed decision comes as volatility across markets has been historically restrained. The Cboe Volatility Index, or VIX, is trading around 12, near a 52-week low and far from the 20 level that raises concerns for traders.

The market is pricing in a roughly 70 percent probability that the Fed will cut rates in September.

“Another step-down would be a positive signal to the markets and likely make the calls for a September cut become deafening,” Tyler wrote.

“One key is whether any of the decline is attributed to shelter prices since this has been a source of the stickiness and any material step-down here is well received and may portend even more disinflation.”