JPMorgan Chase said two key economic data released this week could trigger sharp swings in the stock market as investors consider the future direction of interest rates from the Federal Reserve. The first report, released on Wednesday, is the Consumer Price Index for July. Key inflation data is expected to show consumer prices rose 0.2% from June, for a 3% annual gain, according to economists surveyed by Dow Jones. Economists expect core CPI, which excludes food and energy prices, to rise 0.2% from the previous quarter and 3.2% from the same period last year. On Thursday, traders will get an update on consumer conditions through July retail sales data. Consumption is expected to grow 0.3% from June, or 0.1% if cars are not included. The reports come at a critical juncture for Wall Street, with weaker-than-expected job growth in July raising concerns that the Fed is lagging behind in keeping interest rates so high to fight inflation. This growth scare, combined with the unwinding of the yen “carry trade” following a small hike in the Bank of Japan’s main lending rate, triggered a sharp sell-off last week that sent the S&P 500 to its worst day since 2022. Against this backdrop, JPMorgan this week laid out nine potential scenarios for the stock market based on the results of two readings. Here’s what could happen: CPI rises (above 3.4%) and retail sales rises (above 0.5%) – an outcome the largest U.S. banks called the “most volatile” that could trigger a significant reaction in the bond market. That would lead to a repricing back to expectations for a 25 basis point rate cut (0.25%) at the September Fed policy meeting and put pressure on Jerome Powell to deliver his annual speech in Jackson Hole this month. Reassess the Fed’s actions.” JPMorgan expects the S&P to fall and the Nasdaq to outperform the Russell 2000 in this scenario. Hot CPI and retail sales (up 0.1% to 0.5%) – JPMorgan Chase believes that hot CPI data and retail sales in line with expectations may exacerbate “stagflation risks.” The S&P 500 will fall and the Nasdaq will outperform the Russell 2000. There is no consensus on this,” the bank wrote. If that happens, JPMorgan expects all risk assets to “come from the sale” and the S&P 500 to fall, as will the Nasdaq and Russell 200. In-line CPI (3.0% to 3.4% on an annualized basis) and hot retail sales – an outcome that would be positive for stocks and portend a downward trend in core CPI and strong consumer spending. The S&P 500 will rise and the Russell 2000 will outperform the Nasdaq. Within-the-line CPI and within-the-line retail sales – JPMorgan said this was a “benign result” that would indicate a “cooling but resilient economy without new inflationary impulses”. The S&P 500 is expected to rise, with similar performance from the Nasdaq and Russell. Consumer Price Index (CPI) and Retail Sales Cooling – The extent of the stock market movement in this outcome will depend on the magnitude of the unexpected drop in retail sales. A flat or negative reading would have a “bearish” impact on the market, causing the S&P to fall and the Nasdaq to outperform the Russell. Cool consumer price index (CPI) (annualized below 3.0%) and retail sales hot – “This would be the most optimistic scenario for stocks as it restores the Goldilocks narrative,” JPMorgan wrote. In this case, traders expect the market to expand, with the S&P 500 rising. The Russell 2000 small-cap index should outperform the Nasdaq. Cool CPI and retail sales – which will be another “positive outcome” for the market – suggest “consumer spending remains resilient and there is no inflationary impulse”, the bank said. Relative to the Nasdaq, the S&P 500 is expected to rise and the Russell to outperform. Consumer Price Index and Retail Sales Cooled – JPMorgan Chase & Co. said the results could reignite worries about a recession on Wall Street. As a result, the bank expects the bond market to react in September with pricing cuts of 50 basis points (0.50%) or more. The S&P is expected to fall and the Nasdaq to outperform the Russell.
