U.S. Stocks Poised for Potential Gains Despite Expected Inflation Rise
NEW YORK – October 24, 2023 - Investors are bracing for the release of the Consumer Price Index (CPI) report today, with economists forecasting continued inflationary pressure, yet maintaining an optimistic outlook for the S&P 500. Despite expectations of rising inflation, JP Morgan Chase’s trading arm estimates a roughly 65% probability of a stock market rally following the CPI announcement.
The firm, led by head of global market intelligence Andrew Tyler, anticipates ”less volatile than normal” market reaction on the day of the report. This sentiment is largely driven by expectations of further monetary easing from the Federal Open Market Committee (FOMC) on October 29th, potentially offsetting concerns related to inflation.
“We agree with the market view and believe maximum tail risk is needed to sideline the Fed,” Tyler wrote in a note to clients on Monday.
Bloomberg forecasts predict a 0.3% increase in core CPI - excluding food and energy – from the previous month, translating to a 3.1% year-over-year rise, consistent with August‘s figures and exceeding the Federal Reserve’s 2% target.The overall CPI composite index is projected to climb 0.4% month-over-month and 3.1% year-over-year, a slight increase from August.
The CPI release is notably meaningful as the first major economic indicator as the U.S. government shutdown began on October 1st, providing a crucial signal to investors ahead of the FOMC meeting.
According to Tyler and his team, an CPI report in line with or below expectations could trigger an S&P 500 increase of up to 1.5% today. Conversely, a core inflation rate exceeding 0.4% month-over-month, signaling overheating, could lead to a decline of around 2.3%.
Wall Street anticipates at least two more interest rate cuts before the end of the year, with one largely priced in for the October 29th FOMC meeting. Though, a higher-than-expected CPI reading could complicate the outlook for further rate reductions through 2026.
“If the inflation data is better than expected, there is a possibility that the Fed may not cut rates at the December meeting,” stated Sameer Samana, head of global equities and real assets at Wells Fargo Investment Institute. “The current focus is on the labor market,which continues to cool down,so a rate cut in October is appropriate. However,there will be more uncertainty after that. that said,we expect a rate cut in December as well.”
