Analysts Afraid the Upcoming CPI Data Could Trigger Another Market Chaos
As the CPI data will be released this week, market volatility may further intensify.
The U.S. stock market experienced sharp fluctuations last week, with the Cboe Volatility Index (VIX), which measures the fluctuation of the S&P 500, reaching levels not seen since the peak of the pandemic in 2020. According to a Citigroup report, traders are expecting at least a 1.2% fluctuation in the S&P 500 when the CPI report is released on Wednesday.
This expected fluctuation is consistent with the anticipated volatility following the speech by Federal Reserve Chairman Jerome Powell at the Jackson Hole Economic Symposium on August 23, and the expected volatility following the earnings release of Nvidia on August 29.
The market anticipates that the core CPI, excluding food and energy, will rise by 0.2% month-on-month and 3.2% year-on-year, approaching the Federal Reserve's 2% target. However, if the numbers significantly exceed or fall short of expectations, traders may readjust their forecasts, which could trigger another round of market chaos.
Brooke May, Managing Partner at Evans May Wealth, stated: If the Fed cuts rates dramatically because the economy is slowing, that's not historically good for stock returns, but the economy isn't as bad as people think. I expect more volatility and wouldn't be surprised to see more downside for stocks in the coming weeks.
Although the S&P 500 rebounded from the plunge on Black Monday, roughly flat for the last week, the options market does not fully believe in this recovery. Data compiled by the media shows that the cost of contracts betting on a 10% drop in the SPDR S&P 500 ETF Trust (SPY) within the next 30 days is roughly the highest since October, double that of contracts betting on a 10% increase.
It is worth mentioning that Rocky Fishman, founder of derivatives analysis firm Asym 500, stated that the options market has not yet sent a clear signal to the stock market. Historically, high volatility has been a good time to buy stocks, and the CPI will be an important catalyst.
Traders question whether the expected volatility during Powell's speech will be higher after the inflation data release, as it may announce a rate cut plan. His message later this month may help investors predict the number of rate cuts next year after he stated at the end of July that policymakers are closer to cutting rates as early as September.
Thomas Urano, Co-Chief Investment Officer at Sage Advisory, said, We're at an inflection point where what had been bad economic news is now perceived as good news since it would be a catalyst to force the Fed to pivot, but if data continues to soften, that backdrop will disappoint stock investors and lead to larger swings in stocks.
Even if inflation picks up slightly, will it not shake the expectation of a rate cut in September?
Analysts also pointed out that even if the U.S. inflation rate rises slightly in July, it is not enough to shake the expectation of a rate cut by the Federal Reserve in September.
If the CPI data meets expectations, it indicates that inflation is still on a downward trend. Economists believe that inflation will pick up slightly after the unexpectedly low inflation data in June. The reversal of inflation is mainly due to the so-called core services (excluding housing), a key category that policymakers are concerned about. Some forecasters also pointed out that there is an upside risk to commodity prices due to rising transportation costs.
However, the long-anticipated slowdown in housing costs that began in June should continue, with housing costs accounting for about one-third of the overall CPI, making it an important determinant of the overall inflation trend.