BofA strategists warn market is underpricing crucial CPI data

BofA strategists warn market is underpricing crucial CPI data
Key measure of inflation will be published Wednesday 8.30am ET.
DEC 11, 2024
By  Bloomberg

by Michael Msika

While the fight against inflation may largely have been won, tensions over price pressures could still disrupt confidence about interest-rate cuts. The stock market seems to be looking past these warnings.

Equities have flourished in the favorable “Goldilocks” conditions of a resilient economy, falling inflation and rate cuts. Yet there are worrying signs in price movements, while reflationary expansionist fiscal policies could pose a risk to the easing cycle. Tariffs under Donald Trump’s administration threaten to bump up inflation projections for next year. For the moment, all eyes are on Wednesday’s US consumer price index figures. 

Investors appear sanguine in the hours leading up to the print, with options on the S&P 500 index implying a move of 45 basis points. That’s lower than the average realized move of 71 basis points over the past year, according to Bloomberg calculations.

“The market is underpricing CPI risk,” said Bank of America Corp. derivatives strategists including Gonzalo Asis. “We believe CPI matters more this time.”

The strategists note that the market has under-reacted on CPI days since February, with more focus instead on the growth outlook. Yet, worries about the economy have moderated, while the most recent inflation data surprised to the upside by the biggest margin since May. 

That has set up inflation readings and central bank meetings as this month’s biggest risk events. A cooler CPI print today can clear the path for a late December rally, in what’s typically the second-strongest period in the year for stocks. A hotter print could revive volatility, the BofA team says.

The annual US inflation gauge remains above target and is expected to tick up to 2.7%. Investors have already identified accelerating global price pressures as the biggest tail risk to equities, according to BofA’s November fund managers survey, with 32% picking this worry above geopolitics at 21%. While the market may have stumbled a bit earlier this week, the mood among investors remains outright bullish. 

A JPMorgan Chase & Co. Market Intelligence team led by Andrew Tyler has laid out scenarios for market reaction ahead of Wednesday’s data release. Looking at the month-on-month CPI, they see a 65% chance that the figure will be an increase of between 0.25% and 0.35%, which would imply gains for the S&P 500 between of 0.25% and 1%. 

The team sees a 30% chance of a print between 0.35% and 0.4%, which could send the benchmark down 0.5%. In the unlikely scenario that the figure exceeds 0.4%, the S&P 500 could fall by as much as 2.5%, they wrote. 

 

Copyright Bloomberg News

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