US inflation preview: Inflation to trend lower but brace for fireworks
JPMorgan reckons the S&P 500 could rally as much as 10% on a cooler-than-expected inflation print.
KEY POINTS
- Analysts expect US inflation to ease to 7.3% in November from 7.7% in October
- The fall in gasoline is expected to offset continued increases in food prices
- Shelter is the largest component of inflation but the way its reported typically comes with a 12-15 month lag, according to Vanguard
US inflation data. Need I say more? Every single inflation print seems to be more important than the last as we chase this peak inflation and Fed pivot narrative.
The all-important inflation print will be released on Wednesday at 12:30 am AEDT.
Headline inflation was 7.7% in October and consensus expects this figure to fall to 7.3% in November.
Core inflation, which excludes volatile items like food and energy, was 6.3% in October and expected to fall to 6.1%.
Buckle up for turbulence
The last three inflation reports set off some of the wildest sessions this year. From Tuesday's Morning Wrap:
September 13: Hotter-than-expected and worst day for the S&P 500 in two years
October 13: Hotter-than-expected. S&P 500 futures crashed, nosedived on open but staged one of the largest intraday reversals on record
November 10: Better-than-expected and the S&P 500 had its best day this year
Inflation trend: Down but how fast?
"Headline will see a drag from falling gasoline prices (with more to come in December) but get a likely boost from continued increases in food prices." according to Piper Sandler.
US gasoline futures have more than halved from June peaks and down -2.2% in the last twelve months.
US gasoline futures (Source: TradingView)
Conversely, the consumer foods component of US producer price index jumped 3.7% month-on-month, the fastest since May 2020 and before that, since 1974.
"For core, many in-place trends will likely continue to play out: Shelter inflation slowing down, more goods discounting, used car price deflation and health care services prices held down by an inflation quirk," the investment bank said.
Of note, shelter is the largest component of CPI. In October, shelter accounted for more than half of the CPI's 0.4% month-on-month. The way the Bureau of Labour Statistics reports shelter comes with a significant lag on actual prices.
"It typically takes 12–15 months or more for a meaningful change in housing activity to translate into higher or—in this case—lower rents," according to Vanguard.
Still, Zillow's observed rent index shows a massive decline in rent prices, down to 9.6% year-on-year from peaks of around 17%.
JPMorgan's scenario analysis
The S&P 500 rallied 5.5% after the cooler-than-expected inflation print on 10 November. This view was in-line with JPMorgan's inflation scenario analysis which said, "seeing a stepdown in inflation of this magnitude likely pulls the 10-year yield below 4.0% (currently 4.158%) and triggers a sharp rally in stocks."
The investment bank's trading desk offers a new game plan for traders on the CPI Day.
November CPI reading | Probability | S&P 500 reaction |
|---|---|---|
7.8% or higher | 5% | Down 4.5% to 5.0% |
7.5% to 7.7% | 25% | Down 2.5% to 3.5% |
7.2% to 7.4% | 50% | Up 2% to 3% |
7.0% to 7.2% | 15% | Up 4% to 5% |
6.9% or lower | 5% | Up 8% to 10% |
Source: JPMorgan, Bloomberg | Table: Market Index
