JPMorgan Chase's traders have divided this week's U.S. CPI report into six possible scenarios and have given their predictions on how the S&P 500 Index will react to this report. JPMorgan's trading department reminds investors to prepare for the U.S. stock market's sharp fluctuations due to the CPI report after a long period of calm.

On Thursday of this week, the U.S. Bureau of Labor Statistics will release the June CPI inflation data, with the market expecting this significant inflation indicator to move further towards the Federal Reserve's target. Wall Street anticipates that in June, the core CPI (excluding the more volatile food and energy sectors) is expected to remain unchanged from May's 3.4% year-over-year increase; the month-over-month increase is expected to rise by 0.2% for the second consecutive month, potentially setting the smallest consecutive two-month increase since August of last year. The overall CPI year-over-year increase is expected to drop from May's 3.3% to 3.1%, marking the lowest record in five months; the month-over-month increase is expected to be 0.1%, a slight rise from the previous value of 0%.

JPMorgan's traders have divided this week's U.S. CPI report into six possible scenarios and have given their predictions on how the S&P 500 Index will react to this report.

Scenario 1: CPI increases by 0.15%-0.20% month-over-month, with a 35% probability.

In this scenario, JPMorgan's traders predict that the S&P 500 Index will rise by 0.5%-1.0%, as this would make the calls for a rate cut by the Federal Reserve in September deafening. A key point is whether the cooling of inflation is attributed to housing prices, as this sector is one of the significant reasons for the stickiness of inflation. Any substantial cooling in housing prices would be welcomed and could indicate further cooling of inflation.

Scenario 2: CPI increases by 0.20%-0.25% month-over-month, with a 30% probability.

JPMorgan believes that whether it is 0.20% or 0.25% is important for the initial market reaction, as 0.25% rounds up to 0.3%, and the market's initial reaction might be negative, while 0.20% might be seen as positive. In this scenario, JPMorgan predicts that the S&P 500 Index will rise by 0.25%-0.75%.

Scenario 3: CPI increases by 0.25%-0.30% month-over-month, with a 15% probability.

In this situation, the S&P 500 Index is expected to fall by 0.75%-1.25%, as such a report might indicate an increase in housing inflation.

Scenario 4: CPI increases by 0.10%-0.15% month-over-month, with a 15% probability.

Investors favor this outcome, as it might indicate that the cooling of commodity inflation is accelerating. In this scenario, the S&P 500 Index will rise by 1.0%-1.5%.

Scenario 5: CPI increases by more than 0.30% month-over-month, with a 2.5% probability.

JPMorgan's traders believe that such a scorching inflation report would trigger a 1.25%-2.5% decline in the S&P 500 Index. This is the first tail risk scenario, which means that the process of cooling core commodity inflation might reverse, thereby pushing up monthly inflation figures. Depending on the specific CPI data, combined with last week's weak growth data, the best-case scenario for the market might shift towards a recession narrative, while the worst case would be a stagflation narrative.

Scenario 6: CPI increases by less than 0.10% month-over-month, with a 2.5% probability.

This tail risk would drive the S&P 500 Index to rise by 1.0%-1.75%, and JPMorgan's traders point out that this could even lead to calls for a rate cut as early as July.

Is the U.S. stock market's calm period about to end?

JPMorgan's trading department reminds investors to prepare for sharp fluctuations in the U.S. stock market due to the CPI report after a long period of calm.

Andrew Tyler, Head of U.S. Market Information at JPMorgan's trading department, said:

The price of at-the-money straddle options expiring on Thursday indicates that the options market is currently betting on a 0.9% fluctuation in the S&P 500 Index by Thursday.

The latest U.S. CPI report will be released before the U.S. stock market opens on Thursday. With traders betting that a slowdown in inflation will push the Federal Reserve to cut rates twice within the year, the report may trigger unusual market volatility.

Several former Federal Reserve governors believe that September is an appropriate time for a rate cut. With this in mind, we remain tactically bullish, but with slightly reduced confidence.

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