(Bloomberg) — Wall Street’s most prominent trading desks, from JPMorgan Chase & Co. to Citigroup Inc., are urging investors to prepare for a stock market shock this week after the latest inflation data and the Federal Reserve’s interest rate decision, both arriving on Wednesday.
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The options market is betting that the S&P 500 Index will move 1.3% to 1.4% in either direction on Friday, based on the price of at-the-money straddles expiring that day, said Andrew Tyler, head of U.S. market intelligence at JPMorgan. Chase’s trading desk. This would come in the wake of Wednesday’s consumer price index report and the Federal Reserve’s interest rate decision that afternoon.
“With CPI and Fed happening on the same day, there is a possibility that a CPI result could be reversed by Powell’s press conference,” Tyler and his team wrote in a note to clients on Monday.
Meanwhile, investors are preparing for a stock market move on Fed Day that would be the biggest since March 2023, according to Stuart Kaiser, head of U.S. equity trading strategy at Citigroup.
If the core CPI rises above 0.4% on a monthly basis, it would likely trigger a sell-off in all risky assets, with the S&P 500 falling between 1.5% and 2.5%, according to Tyler. But he only sees a 5% chance of that happening.
The May core CPI forecast, which excludes volatile food and energy components and is seen as a better underlying indicator than the core measure, is expected to rise 0.3% from a month earlier.
If the core CPI is between 0.3% and 0.35% from the previous month – the most likely scenario for JPMorgan’s trading desk – the S&P 500’s outcome ranges from a loss of 0.75% to a gain of 0.75% depending on shelter disinflation, along with increases in inflation. vehicle and medical prices, Tyler wrote.
If the core CPI is between 0.20% and 0.25% month-on-month, Tyler said there would likely be an increase in interest rate cut expectations in September. Some traders may even be betting on a “surprise, insurance” in July after the European Central Bank cut borrowing costs for the first time in five years last week, he explained.
Anything below 0.2% will be considered a substantial positive for stocks, triggering a 1.75% to 2.50% rally in the S&P 500, he added.
The potential for a major reversal around the CPI report and the Fed’s decision comes as market volatility has historically been subdued. The Cboe Volatility Index, or VIX, is trading near a 52-week low and at 13 is far from the 20 level that is starting to worry traders.
Notably, U.S. job growth soared in May, prompting traders to delay the expected timing of rate cuts when the data was reported last week.
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