JP Morgan plots inflationary scenarios for Wall Street

JP Morgan Chase bank analysts have done it again. They wrote out a detailed scenario of market reaction to December data on consumer inflation in the US. These data will be published on January 12.

The market expects inflation to drop

The event of Thursday, but also one of the events of the second week of January in the financial markets, will be the publication of data on consumer inflation (CPI) in the United States. According to market forecasts, annual dynamics in December CPI inflation will fall to 6,5 percent. from 7,1 percent in November and against 7,7 percent. in October.

According to forecasts, core CPI inflation, a measure which may be watched even more closely than the main figure, is expected to fall to 5,7% in December. from 6 percent Y/Y in November.

US consumer inflation forecast (December 2022). Source: macroNEXT

Possible inflationary scenarios

Bank analysts JP Morgan estimate that the most likely scenario there is a decline in CPI inflation to 6,4-6,6 percent. They indicate that the chances of realizing such a scenario are 65%. In their opinion, such a reading would be positively received by investors and provoke an increase in the S&P500 index by 1,5-2 percent.

The second most likely scenario, although much less realistic than the first one, is a deeper fall in inflation in December. To levels below 6,4 percent. from 7,1 percent in November. This, in the opinion of analysts, will reduce expectations for interest rate hikes by the Fed, while causing euphoria in the US stock market. In such a scenario S & P500 index will increase by 3-3,5 percent.

Third scenario assumes a lower-than-expected fall in inflation. To levels above 6,6 percent. The probability of this scenario is estimated at 15%. Its implementation would mean deep drops on the stock exchange, because the S&P 500 index would plunge by 2,5-3 percent.

The described inflation report will be an important, but not the only factor shaping moods on the US stock market in the near future. The season for publishing financial results for the fourth quarter of 2022 by American companies starts on Friday. Traditionally, the season will be opened by the largest banks.