The release of Core CPI (Consumer Price Index) data is a pivotal moment for financial markets, especially for equity investors. The month-over-month (MoM) Core CPI, which excludes volatile food and energy prices, provides insights into underlying inflation trends and can impact the market’s expectations of Federal Reserve policy adjustments. Here’s a closer look at how different Core CPI figures are expected to influence the S&P 500 (SPX).

Core CPI MoM Scenarios and SPX Reactions

1. Core CPI < 0.25%

• Expected SPX Reaction: +1.20%
• Interpretation: A lower-than-expected inflation rate signals that price pressures are easing, which can decrease the likelihood of rate hikes from the Federal Reserve. This outcome would likely boost investor confidence, potentially leading to a significant rally in the SPX.

1. Core CPI between 0.25% and 0.30%

• Expected SPX Reaction: +0.80%
• Interpretation: While not as low as the first scenario, this range is still below the general market consensus and indicates manageable inflation. The SPX might see a moderate positive response as markets interpret the data as a sign that the Fed might not need to tighten monetary policy as aggressively.

1. Core CPI between 0.31% and 0.34%

• Expected SPX Reaction: +/- 0.30%
• Interpretation: This range, close to the consensus (with some estimates like Goldman Sachs at 0.31%), would likely result in a more neutral response from the SPX. This figure aligns with current market expectations, implying that no major policy surprises are on the horizon, keeping investor sentiment relatively steady.

1. Core CPI between 0.35% and 0.40%

• Expected SPX Reaction: -0.80%
• Interpretation: Higher inflation in this range might increase concerns over persistent price pressures, suggesting that the Fed could continue with its rate hikes or maintain a hawkish stance for longer. This scenario may lead to a sell-off in the SPX as investors grow cautious about tighter financial conditions.

1. Core CPI > 0.40%

• Expected SPX Reaction: -1.50%
• Interpretation: A figure above 0.40% could spark fears of entrenched inflation, increasing the likelihood of more aggressive Fed action. This could result in a sharp decline in the SPX, as higher rates generally dampen corporate earnings and reduce stock valuations.

What to Expect in the Short Term

With the Core CPI data set to release soon, the implied move for the SPX suggests a potential shift of around 0.55% by the close of the next trading day. This implies that the market is preparing for a moderate response but is open to a more significant move depending on whether inflation surprises on the high or low side.

Understanding how markets are likely to react to different inflation scenarios can help investors make informed decisions. While each outcome has its expected reaction, it’s crucial to remember that other factors, such as geopolitical events, earnings reports, and global economic conditions, can also influence market performance.

Investors should keep an eye on Core CPI results, as they provide essential insights into inflation trends and the Federal Reserve’s potential policy direction. Being prepared for these scenarios can help investors navigate market volatility and make more strategic portfolio adjustments.