US inflation preview: JPMorgan says the S&P 500 could rip or dip 5%

The market is bracing itself for another high stakes US inflation print that'll sink or swim the already wobbly Fed pivot narrative.

Economists expect headline inflation to ease to 7.9% in October from 8.2% in September. Core inflation, which excludes volatile categories such as energy and food, is expected to finally soften to 6.5% from 6.6%.

Of the 10 inflation reports so far this year, seven were hotter-than-expected and on average, the S&P 500 fell -0.7%.

Inflation scenario analysis: JPMorgan

JPMorgan's Mike Feroli outlines the scenarios for markets' reaction to tonight's inflation print (likelihood of occurrence):

• 8.4% or higher (5%): "This would be a move back to July levels of inflation, which we may see on a MoM basis but think equity investors care most about the Headline YoY level. This would represent the largest differential between actual and estimated in this cycle. S&P 500 down 4.5% to 6.0%.

• 8.1% to 8.3% (30%): "There have been 4 misses of 20 bps or more and the S&P 500 fell ... 2.3% [on] average."

• 7.9% to 8.0% (40%): "I think bonds, and thus stocks, take this as a small positive since it meets expectations and does not reprice yields higher. Given that we are at the bottom of our Cash Trading team's range (3,700 to 3,900), we may see some covering leading to an uptick in stocks. S&P 500 higher 1.0% to 1.5%."

• 7.7% to 7.9% (20%): "This could be similar to the August 10 print which had a dovish beat by 20 bps and triggered a 2.1% rally in [the] S&P 500 ... Cyclicals, Value Shorts, Momentum Shorts and ARKK the best performers that day. Given the increased bearishness, the magnitude of the move could be larger. S&P 500 higher 2.5% to 3.5%."

• 7.6% or below (5%): "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. This may also reset the yield curve lower with terminal rate expectations falling under 5.0%. S&P 500 higher 5.0% to 6.0%."

The Fed: Ever so hawkish

Its an almost coinflip like scenario for the Fed's December meeting. CME's Fedwatch tool currently estimates a 54.4% likelihood of a 50 bp rate hike and 45.6% for 75 bps.

During the Fed's November interest rate decision, Powell made it crystal clear that they would rather go too far with rates than not far enough.

"If we were to over-tighten, we could use our tools to support the economy later on; but if we failed to tighten enough, inflation would become entrenched and that would be a much bigger problem," said Powell.