Embrace for A Big Jump in Risk Assets If US CPI Inflation Falls Below 7%

Today we have the last major economic release from the US before the FED rate decision tomorrow and it is the most important by far, since the FED is relying on inflation figures for interest rates. They have commented on slowing down and are expected to do so by delivering a 50 bps hike tomorrow, after three 75 bps rate hikes in the last three meetings.

Markets are expecting the FED to continue raising interest rates by 75 basis points (bps) in total next year, but if today’s inflation falls below expectations, then they might even stall earlier. Markets will surely take a low number pretty good and risk sentiment will improve, which will send risk assets such as stock markets, commodities and risk currencies surging higher.

Bloomberg was out yesterday with the scenario outlines from JPM’s trading sales and trading desk. A CPI reading below 7% or lower has the potential to send stock markets between 8% and 10% higher. The desk assigns a 5% probability to that playing out.

• “The logic here is that not only is inflation dissipating, but its pace is accelerating,”
• “This would give increasing confidence in projections of headline inflation falling ~3% in 2023. Further, if inflation is at 3%, irrespective of the labor market conditions, it seems unlikely that the Fed would hold the terminal rate at 5%. Any Fed pivot will rip equities.”

In the most likely scenario is between 7.2% to 7.4% the S&P 500 is expected to climb by 2% to 3% while any near or above the prior reading of 7.7% the stock index is likely to sink as much as 5%, should inflation exceed 7.8%. That’s the most likely reaction in all risk assets, although the size would differ for every instrument.

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Skerdian Meta

Lead Analyst

Skerdian Meta Lead Analyst. Skerdian is a professional Forex trader and a market analyst. He has been actively engaged in market analysis for the past 11 years. Before becoming our head analyst, Skerdian served as a trader and market analyst in Saxo Bank's local branch, Aksioner. Skerdian specialized in experimenting with developing models and hands-on trading. Skerdian has a masters degree in finance and investment.

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