The CPI trade: Here’s where JPMorgan sees the market going, based on these scenarios

Investors are closely anticipating September’s consumer price index report on Thursday for insight into the state of inflation as high rates and yields weigh on the market. Economists polled by Dow Jones are estimating CPI to rise 0.3% on a month-over-month basis and 3.6% from a year ago. This compares to August’s 0.6% monthly gain and 3.7% increase from 12 months earlier. Fed funds futures pricing data indicates a 91% probability the Federal Reserve will hold steady on rates at the end of its Nov. 1 meeting, according to the CME FedWatch Tool . To be sure, a hotter-than-expected rise in producer prices indicated that inflation pressures remain for the U.S. economy. With this backdrop in mind, JPMorgan’s U.S. market intelligence group explained five potential market reactions to the monthly increase in consumer prices: 45% chance — 0.3%, in line with consensus estimates. JPMorgan estimates this outcome would be well-received by the market, and keep stocks on their upward trajectory. This case would support the case for growth without inflation. “A print like this is not quite Goldilocks, but it is close, keeping Fed hiking expectations at ‘none-and-done,'” the firm said. The S & P 500 could add between 0.4% and 0.7% under this scenario. 27.5% chance — Between 0.4% and 0.6%. Although this case is not the most extreme scenario, the bond market would price in a more hawkish Fed, potentially raising the terminal federal funds rate to 6%, JPMorgan said. “As with the previous scenario, the risk is that a more active Fed increases the probability that something breaks while also increasing the depth of the subsequent recession,” the firm said. The market’s move would largely depend on which CPI component surprised the most with its gain — core services would trigger the most downside, while a rise in commodities prices would trigger the least downward movement. The S & P could lose between 0.75% and 1.25% in this scenario. 20% chance — Between 0.2% and 0.3%. This would likely indicate a “dovish miss” for core CPI as the rise in commodity prices is a known upside driver. “This would be the Goldilocks Scenario,” JPMorgan wrote. This could lead to the S & P 500 rallying between 1% and 1.5%. 5% chance — higher than 0.6%. A sharp increase in the CPI would likely increase the likelihood of rate hikes at the Fed’s November and December meetings, JPMorgan wrote. The firm added this outcome also increases the probability of the Fed reducing rate cuts from its 2024 forecast in this scenario. “This tail-risk outcome would ignite fears of a 1970s style inflation ‘wave’ whereby we would begin another significant upswing in inflation data, with both commodity and core prices leading the headline number higher.” This outcome could pull the S & P 500 down in a range of 1.5% to 2%. 2.5% chance — Below 0.2%. “Another tail-risk outcome where some of the most interesting moves could come from the bond market,” JPMorgan wrote. This would pull rate cuts forward as the Fed sees its fight against inflation nearing an end, the firm said. This could also lead to a fall in bond yields and provide support to equities. JPMorgan expects the S & P 500 to jump 1.5% to 2%. —CNBC’s Michael Bloom contributed to this report.