Morgan Stanley: Tonight's US CPI, more likely to be "low" in direction

The US June CPI is coming tonight, and JPMorgan Chase reminds traders to be prepared for CPI lower than expected.

Currently, the market generally expects CPI to rise by 3.1% YoY, further down from the previous value of 4%. However, JPMorgan Chase points out in its latest report that there is an 80% chance that CPI will meet or fall below expectations. Under the same conditions, these results could potentially boost the stock market.

JPMorgan Chase states:

In two completely different tail risk scenarios, the CPI reading will cause market volatility. The probability of a significant slowdown in inflation and a sharp rise in the S&P 500 index is 10%. This probability is twice that of the opposite scenario, where a significant rebound in price pressure due to CPI far exceeding expectations would cause the stock market to decline.

In other words, JPMorgan expects that the year-long slowdown in inflation will lead to the Federal Reserve easing its monetary tightening policy, which is a positive sign for the stock market.

Greater possibility of CPI lower than expected

JPMorgan analyst Andrew Tyler points out:

We believe that the data released this time brings the market closer to the "golden girl," which represents economic growth, profit growth, and inflation normalization. Although the bull market scenario does not require the Federal Reserve to pause rate hikes at the July meeting, it will certainly amplify the upside potential.

JPMorgan believes that the most likely scenario tonight is that CPI will be between 3% and 3.2%, and the S&P 500 index will rise by 0.5% to 0.75%. If the inflation rate is 2.7% or lower, it is expected to cause the S&P 500 to rise by at least 2.5%.

In addition, a survey by 22V Research shows that nearly two-thirds of respondents expect core CPI to be lower than the economists' forecast of 5%.

What will happen to US stocks in different scenarios?

JPMorgan Chase has simulated five possible scenarios for CPI and made predictions on how US stocks will react.

• 45% probability: CPI YoY increase between 3% and 3.2%

The S&P 500 is expected to rise by 0.5% to 0.75%, which is the market's general expectation. This supports the argument that inflation will continue to decline significantly, but it is unlikely to prevent the Federal Reserve from raising rates by 25 basis points in July. However, this result may be enough to eliminate expectations of further rate hikes for the rest of the year.

• 25% probability: CPI YoY increase between 2.8% and 2.9%

In this scenario, the S&P 500 index is expected to rise by 1.5% to 1.75%. People may see a decline in expectations of a rate hike in July. Furthermore, if the rate hike expectations fall below 45%, the Federal Reserve may be forced to yield and once again "skip" a rate hike. Before feeling the full impact of the tightening cycle, people have already seen inflation normalize. The rate hike cycle may officially end at the Jackson Hole Symposium (August 24-26) this year.

• 15% Probability: YoY CPI growth rate between 3.3% and 3.6%

The S&P 500 is expected to decline by 1% to 1.25%, which will hardly alleviate concerns in the market about the Federal Reserve ending its rate-hiking cycle soon. Considering the expected rise in energy prices this summer and the continued strength in consumption, this situation will raise doubts about inflation expectations.

• 10% Probability: CPI at 2.7% or lower

The S&P 500 index is expected to surge by 2.5% to 3%. In this scenario, the Federal Reserve is unlikely to raise rates in July, and the possibility of rate cuts in the fourth quarter will increase.

• 5% Probability: YoY CPI growth of 3.7%

This is the least probable scenario. It will trigger a massive sell-off in the market, with the S&P 500 index plummeting by 2% to 2.5%. Bond yields and stock volatility will increase significantly. The market expects the Federal Reserve to raise rates by an additional 50 basis points in July and in subsequent meetings.