From the perspective of Wall Street institutions, this Thursday is destined to be a day of huge market shocks, and the culprit is the US CPI for October announced on Thursday, November 10, Eastern Time.
Current pricing in the OIS market has fully digested the expectation that the Federal Reserve will raise interest rates by 50 basis points in December, and predicts that at the next monetary policy meeting in December, the probability of the Fed deciding to raise interest rates by 75 basis points is 45%. The current market consensus is that the CPI in October will increase by 7.9% year-on-year. After excluding food and energy, which are more volatile, the core CPI in October will increase by 6.5%.
JPMorgan Chase analyst Andrew Tyler believes that among the economic outlook on inflation and other aspects announced after the Federal Reserve meeting in December, the CPI in October will be the most important factor in determining the Fed's expectations. Tyler’s predictions on CPI and related market reactions are as follows:
- If CPIyear-on-yeargrowth reaches 8.4% or higher, which is equivalent to inflation returning to the July level,S&P 500 indexwill fall by 4.5% to 6% , the probability of this happening is only 5%.
- If the year-on-year growth rate of CPI is 8.1% to 8.3%, S&P 500 will fall by 2% to 3%, the possibility of this situation is 30%.
- If the year-on-year growth rate of CPI is 7.9% to 8.0%, the stock market and bond market will regard this as a bit positive news, because this growth rate is in line with market expectations, and there will be no serious U.S. bond rising yields Pricing, the S&P 500 will rise by 1% to 1.5%, and the possibility of this situation is 40%.
- If the year-on-year growth rate of CPI is 7.7% to 7.9%, this may be similar to the announcement of the U.S. CPI in July on August 10. The growth rate of CPI in July was lower than that in June, and the growth rate was 0.2 percentage points lower than market expectations. It stimulated the market’s hope that the Fed would turn dove. At that time, after the data was released, the S&P rose by 2.1%. If this was the case for the CPI in October, the S&P would rise by 2.5% to 3.5%. The possibility of this situation There are 20%.
- If the CPI grows by 7.6% year-on-year or at a lower rate, a sharp slowdown in inflation growth may cause the US 10-year treasury bond yield to fall below 4.0%, triggering a big rebound in US stocks , the S&P may rise by 5% To 6%, the probability of this situation is 5%.
JP Morgan’s chart below shows the market performance on CPI announcement days in the past year. Generally speaking, CPI announcements have a negative impact on US stocks. When the CPI growth rate is lower than expected, the S&P 500 rose by an average of 0.8%, higher than expected On average, it fell by 1.2%.
JPMorgan Chase’s chart below shows that the observation period is extended from the current day to five days, that is, the market’s reaction within five days after the announcement of the CPI. Overall, the S&P rose by an average of 3.2% after the announcement of the CPI. Expected to fall an average of 1%.
Mike Feroli, chief economist at JP Morgan Chase, said that the bank expects October CPI to grow by 0.6% month-on-month, and the year-on-year growth rate fell from 8.2% in September to 7.9%, both in line with consensus expectations. JPMorgan Chase expects the core CPI to increase by 0.38% month-on-month in October, and the year-on-year growth rate will drop from 6.6% in September to 6.4%, both of which are lower than consensus expectations.
JPMorgan Chase believes that the continued stabilization of rent will affect the core CPI in October, and the rent-related growth in October will be slightly more moderate than that in September. In addition, growth in many of the other major components of the CPI will also be weaker, such as data from the auto industry showing recent declines in prices related to cars, especially used cars.
Jan Haztius, chief economist at Goldman Sachs , predicted this week that the core CPI in October will increase by 0.44% month-on-month, which is lower than the consensus expected growth rate of 0.5%. He expects a year-on-year growth rate of 6.46%, slightly lower than the consensus estimate of 6.5%. Goldman Sachs expects that food and energy prices will increase moderately in October, resulting in a 0.49% month-on-month increase in the overall CPI, which is lower than the consensus estimate of 0.6%, and a year-on-year growth rate of 7.8%, which is also lower than the consensus estimate of 7.9%.
As a bearish trader in the Goldman Sachs trading room, Matt Fleury pointed out that the S&P 500 ATM option straddle is currently 2%, which means that the market has 2% pricing on Thursday, but most US stocks rose The space has been exhausted, and the market has pre-traded a lot of expectations of weaker CPI inflation.
Fleury predicts that if the core CPI increases by 0.3% month-on-month in October, the S&P will rise by 2%; if the core CPI increases by 0.4% month-on-month, the S&P will rise by 0.5%; The core CPI increased by 0.6%, and the S&P will fall by more than 3%.
Fleury also believes that this week's CPI release may behave more like September's CPI release, rather than October's release. There was bottom-buying and in October, and the opposite happened in September.
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