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A landmark jobs report raises the stakes for upcoming inflation data, BofA analysts say.
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The analyst predicted that an upside surprise for the CPI in September would bring new volatility.
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September jobs crushed expectations on Friday, with 254,000 new jobs added last month.
September’s jobs report was good news, but it gives investors more reason to brace for the next inflation reading, Bank of America analysts say.
The analysts say last week’s blockbuster jobs report is putting more pressure on this week’s consumer price index data, with a big surprise on the upside now more likely to herald a wave of market volatility. They say the CPI reading, due on Thursday, is “no longer a non-event”.
“Following last Friday’s huge jobs report, we believe the importance of the CPI has increased this week,” the analysts said in a Sunday note. “A big surprise could create uncertainty about the easing cycle and more volatility in the market.”
They note that options are pricing in a move of 109 basis points, or just over 1%, in the S&P 500 on Thursday’s CPI release, compared to forecasts of a 91 basis point move last week. That would exceed the three-month average of a 70 basis point move on the day of a CPI release, and a move of that magnitude would be the largest swing associated with a CPI report since May.
On the upside, the analysts say stocks could withstand a slight upside surprise if it’s tied to strong macro data.
“Good news is good news for equities, as long as inflation does not flare up again,” the analysts said. They added that stocks and interest rates have historically moved higher when inflation is lower, and lower when inflation is on an upward trajectory.
Economists predict the CPI report will show that inflation eased further last month, rising at an annual rate of 2.3%, up from 2.5% in August.
As inflation has returned to the Fed’s 2% target, the central bank has increasingly focused on the labor market after years of fighting inflation. That pivot was behind the central bank’s decision to implement a massive 50 basis point interest rate cut last month, the first cut in four years.
However, with September’s successful jobs report, some economists say inflation is still a concern. If this week’s CPI data surprises on the upside, the Fed could be forced to turn its attention back to price pressures in the economy.
“The September CPI will be a key release. If prices rise faster than expected, on top of stronger labor data, the Fed’s chances of skipping the November meeting will increase,” UBS economist Brian Rose said in a note note from Friday.
According to CME’s FedWatch tool, the probability of a Fed rate cut next month fell 50 basis points from 33% to zero after the release of the September jobs report. So Thursday’s CPI reading will be an important indicator as investors anticipate the Fed’s next move.
The September jobs report exceeded expectations, adding 254,000 nonfarm payrolls compared to expectations of 150,000. The unemployment rate fell from 4.2% to 4.1%.
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