Industrial Forex: CPI carnival night? JPMorgan Chase: Prepare for lower-than-expected data

JPMorgan's sales and trading desk said traders hoping to profit from Wednesday's surprise US CPI data would do well to brace for lower-than-expected data.

Although the consensus forecast for U.S. CPI growth in June is 3.1% annualized, the JPMorgan team, including Andrew Tyler, believes that...shouldThere is a four-in-five chance that the data will match or fall short of expectations, and all other things being equal, this series of results could boost U.S. stocks.

In two distinct tail risk scenarios where CPI data leads to market volatility,shouldThe team believes that,There is a 10 per cent chance of a sharp slowdown in inflation and a subsequent surge in the S & P 500, twice as likely as the opposite scenario, where renewed upward pressure on CPI causes stocks to fall.

In other words,The JPMorgan team expects that a year of slowing inflation will allow the Federal Reserve to ease monetary tightening, which bodes well for stocks."I think this will move the market closer to Goldilocks, with economic growth, earnings growth and inflation normalising," Mr. Taylor and his colleagues wrote in a note to clients this week.

shouldThe team's most likely scenario is CPI growth of between 3 per cent and 3.2 per cent, with the S & P 500 rising 0.5 per cent to 0.75 per cent. A CPI increase of 2.7 per cent or less is expected to trigger an S & P 500 gain of at least 2.5 per cent.

Inflation trajectories have become a focus for Wall Street traders in recent years, especially after the Federal Reserve underestimated the stickiness of inflation and then hastily raised interest rates at a pace not seen in decades. Market volatility typically spikes around the time of each CPI report in 2022, though anxiety has eased somewhat this year. The Cboe 1-Day Volatility Index, which measures the expected price movements of the S & P 500 over the next 24 hours, recently traded around 16, lower than any data seen before the CPI release since May 2022.

Of course, trading on a CPI day is not straightforward. The JPMorgan team's strategy suggests that investors are at high risk. First, there are different items in the CPI data, and there is disagreement about which is more important to traders. The JPMorgan team focuses on the headline data, while a survey by 22V Research focuses on so-called core inflation, which excludes food and energy.

In 22V's survey of clients, nearly two-thirds of respondents expect core CPI to be below the 5% forecast by economists in the Bloomberg survey. About 54% think the data will be positive for risk-on assets. Over the past year, the S & P 500 has moved by an average of 1.6% on CPI trading days. This time, says Danny Kirsch, head of options at Piper Sandler & Co.,The implied volatility of the options market is around 0.7%。