JPMorgan's Outlook on Market Reaction to CPI Data

JPMorgan's trading desk believes that even though economists expect Friday's Consumer Price Index (CPI) to show persistent inflation, stock traders are likely to shrug it off. The primary reason is that the market is currently driven by optimism regarding a "likely Fed rate cut next week."

The team, led by Andrew Tyler, points out that stock market volatility on the day of the CPI release "will be lower than usual" because investors' expectations of another Fed rate cut on October 29 are likely to offset any inflation-related anxieties. They judge that even if economists widely expect the CPI reading to be higher than anticipated, the probability of the S&P 500 index rising after the data release is still estimated at around 65%.

"We agree with the market's view that only extreme tail risks could cause the Fed to put its rate cut plans on hold," JPMorgan's Global Market Intelligence head Tyler wrote in a note to clients on Wednesday.

Bloomberg surveys indicate that economists expect a 0.3% month-over-month increase in the September core CPI (excluding volatile food and energy components), and that the year-over-year increase will remain at 3.1% – the same as the previous month, and well above the Fed's 2% inflation target.

Friday's CPI data is the first significant economic report since the government shutdown on October 1, and it is of great importance to investors. This data will represent one of the few clear signals reflecting economic conditions before the Fed's interest rate meeting, and may set the market's course for the remainder of the year.

Additional Analysis and Market Outlook

While the market is focused on the potential for a rate cut, it's important to consider that high inflation could limit the Fed's ability to move freely. Historical data suggests that the Fed tends to be very cautious in both rate-hiking and rate-cutting cycles, especially when there is uncertainty about the trajectory of inflation. Therefore, investors should carefully monitor upcoming economic data and assess potential risks and rewards before making any decisions.

Some analysts have cautioned that an overemphasis on rate cuts could lead to a downplaying of other economic factors, such as GDP growth and corporate earnings. It is important to conduct a comprehensive analysis of all economic indicators before making decisions.

The Impact of Government Shutdown

The recent government shutdown, while resolved, has created a lag in the availability of economic data. This lag increases the importance of the CPI data, as it provides a more current snapshot of the economy. Investors should be aware that future data releases may also be affected by the shutdown, potentially leading to revisions and adjustments.