Two key economic data reports out this week could trigger a major move in equities as investors consider the future path of interest rates for the Federal Reserve, according to JPMorgan. The first report — out Wednesday — is July’s consumer price index. The key inflation print is expected to show consumer prices rose 0.2% from June, and 3% on a year-over-year basis, according to economists surveyted by Dow Jones. The core CPI, which excludes food and energy prices, is estimated by economists to increase 0.2% month-over-month and 3.2% from a year ago. On Thursday, traders get the latest reading on the state of the consumer with retail sales data for July. Consumption is expected to climb 0.3% from June, or 0.1% excluding autos. The reports come at a critical time for Wall Street after July’s weaker-than-expected employment growth led to concerns that the Federal Reserve is behind the curve in keeping interest rates so high to fight inflation. That growth scare, coupled an unwind in the yen “carry trade” after a tiny increase in the Bank of Japan’s main lending rate, triggered a steep sell-off last week that drove the S & P 500 to its worst day since 2022. Against this backdrop, JPMorgan laid out nine potential scenarios for equity markets this week based on the outcome of both readings. Here’s what could happen: Hot CPI (more than 3.4%) and hot retail sales (more than 0.5%) — The largest bank in the nation refers to this as the “most volatile” outcome, which could trigger a significant response in the bond market. This would lead to a repricing back to expectations of a 25-basis point cut (0.25%) at September’s Federal Reserve policy meeting, and put pressure on Jerome Powell to “reassess the Fed’s action” at this month’s annual Jackson Hole speech. JPMorgan expects the S & P to fall and the Nasdaq to outperform the Russell 2000 under this scenario. Hot CPI and inline retail sales (up 0.1% to 0.5%) — JPM believes that a hot CPI print and retail sales matching expectations could fuel “stagflation risks.” The S & P 500 would fall and the Nasdaq would outperform the Russell 2000. Hot CPI and cool retail sales (less than 0.1% growth) — This would be the “most stagflationary scenario, for which the market does not have a consensus playbook,” the bank wrote. If this occurs, JPM expects all risk assets to “come from sale,” with the S & P 500 falling and the Nasdaq and Russell 200 faring similarly. Inline CPI (3.0% to 3.4% on annual basis) and hot retail sales — This outcome would benefit equities, and signal both a downward trend in core CPI and strong consumer spending. The S & P 500 would rise, while the Russell 2000 would outperform the Nasdaq. Inline CPI and inline retail sales — JPM referred to this as a “benign outcome” that would signal a “cooling but resilient economy without a renewed inflationary impulse.” Expect the S & P 500 to gain and Nasdaq and Russell to perform similarly. Inline CPI and cool retail sales — How much equities move in this outcome depends on the magnitude of the downside surprise in retail sales. A flat or negative reading would have “bearish” implications for the market, leading the S & P to fall as the Nasdaq outperforms the Russell. Cool CPI (less than 3.0% on an annual basis) and hot retail sales — “This is will be the most bullish scenario for Equities as it resumes the Goldilocks narrative,” JPMorgan wrote. In this scenario, traders expect a broadening in the market that includes the S & P 500 gaining. The Russell 2000 index of small stocks should outperform the Nasdaq. Cool CPI and inline retail sales — This would be another “positive outcome” for the market that shows “still resilient consumer spending without an inflationary impulse,” the bank said. Expect the S & P 500 to gain and the Russell to outperform relative to the Nasdaq. Cool CPI and cool retail sales — JPM says that this outcome could reinvigorate recession concerns on Wall Street. As a result, the bank projects that the bond market would react by pricing in a 50- basis point cut (0.50%) or more in September. Expect the S & P to fall and Nasdaq to outperform the Russell.
