"The CPI Trade: JPMorgan's Market Predictions Based on Various Scenarios"

Investors focus on consumer price index report amid fears of rising rates

Consumer price index expected to rise by 3.1% in June

Investors will be closely watching the latest consumer price index (CPI) report this week. There are fears that the Federal Reserve may need to continue increasing interest rates, which is weighing on market sentiment. Economists are predicting a rise of 3.1% in CPI for June compared to the same period last year. Excluding food and energy, they forecast a 5% advance. This comes after the June jobs report showed wages growing at a slightly higher-than-expected pace, raising concerns about inflation and the possibility of further rate hikes by the Fed.

Various scenarios for market reaction to the CPI report

JPMorgan traders have outlined five scenarios for how the market might react to the CPI report, depending on the increase in CPI from the previous year. The most likely outcome, with a 45% probability, is CPI between 3% and 3.2%. In this scenario, the disinflation narrative would be supported, but it is unlikely to change the Fed's decision to hike rates by 25bps in July. However, it may be enough to remove expectations of further rate hikes for the rest of the year. Under this scenario, the S&P 500 is expected to rise between 0.5% and 0.75%.

Other scenarios include:

- 25% chance of CPI between 2.8% and 2.9%, resulting in a rally of 1.5% to 1.75% in the S&P 500. - 15% probability of CPI between 3.3% and 3.6%, which would raise concerns about the Fed's hiking cycle and lead to a drop of 1% to 1.25% in the S&P 500. - 10% chance of CPI at 2.7% or lower, which would take a rate hike in July off the table and potentially increase the possibility of a rate cut in the fourth quarter. The S&P 500 is expected to rally between 2.5% and 3%. - 5% probability of CPI at 3.7% or higher, triggering a market selloff of 2% to 2.5% in the S&P 500. This scenario would indicate a worrying trend of core inflation and could lead to expectations of further rate hikes by the Fed.

The impact on the market

The outcome of the CPI report will have a significant impact on market sentiment and expectations regarding future rate hikes. Investors will be closely monitoring the CPI data as they assess the potential effects on various sectors and adjust their investment strategies accordingly. The reaction of the S&P 500 and other market indices will provide valuable insights into how investors perceive the inflationary pressures and the Federal Reserve's response. It remains to be seen whether the CPI report will alleviate concerns about inflation or if it will further fuel expectations of a prolonged tightening cycle by the Fed.

Conclusion: The Impact on New Businesses

The upcoming consumer price index (CPI) report and its potential effects on interest rates and market sentiment will undoubtedly have implications for new businesses. As investors closely monitor the CPI data, entrepreneurs should be aware of the possible outcomes and adjust their strategies accordingly. In the most likely scenario, where CPI increases between 3% and 3.2%, the market may experience a modest rise, but the Federal Reserve is still expected to proceed with a rate hike. This suggests that borrowing costs may become slightly more expensive, impacting new businesses that rely on external funding. However, the removal of expectations for further rate hikes may provide some relief, as entrepreneurs can anticipate a period of relative stability. On the other hand, if inflation exceeds expectations, and CPI rises above 3.6%, concerns about the Federal Reserve's hiking cycle may arise. This could lead to a drop in the market, potentially affecting investor confidence and creating a more challenging environment for startups seeking financing. Overall, the outcome of the CPI report will influence the sentiment of investors and their willingness to take risks in the market. New businesses should closely observe these developments and consider how changes in interest rates and market conditions could impact their growth and funding opportunities. Adapting business plans to potential rate hikes or identifying alternative funding sources may be necessary to navigate the evolving economic landscape. Being proactive and staying informed about market trends will be crucial for new businesses to successfully navigate potential challenges and capitalize on opportunities. Article First Published at: https://www.cnbc.com/2023/07/10/the-cpi-trade-what-jpmorgan-sees-the-market-doing-based-on-these-scenarios.html