Bulled-Up US Equity Traders Look Past Threat of a Hot CPI Report

Source: Citi Global Markets Bloomberg

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(Bloomberg) — Stocks traders appear to be shrugging off the possibility of a hotter-than-expected inflation print on Tuesday, leaving them vulnerable if President Donald Trump’s trade war leaves its mark on US consumer prices. 

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Bets in options markets show traders expect the S&P 500 Index to swing 0.6% in either direction following the 8:30 a.m. New York time release of June consumer price figures, according to data compiled by Citigroup Inc. That’s broadly in line with how much markets have moved during the last two CPI releases, when consumer prices rose less than expected. However, it’s well below the average realized move of roughly 0.9% over the past year on those days.

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The recent stretch of tame inflation has helped fuel a roaring rebound in the S&P 500 while also stoking speculative fervor in riskier corners of the market. Yet economic forecasters say it’s only a matter of time before tariffs push consumer prices higher — a warning that bond investors appear to be heeding, even as stocks seem unperturbed. 

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“Yields have been rising this month, so fixed-income traders are concerned about this issue,” said Matt Maley, chief market strategist at Miller Tabak & Co. “However, stock traders are completely ignoring the possibility of higher inflation from the new tariffs. So, if the number is hotter than expected, it’s going give the stock market a surprising jolt.”

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How stocks react to a potentially hotter-than-expected inflation number could offer insight into the staying power of a rally that has seen the S&P 500 gain roughly 25% from its April 8 low, with equities managing to hold their ground as Trump has delivered a fresh round of tariff threats. Signs of re-accelerating inflation would undercut the case for the Federal Reserve to cut interest rates in coming months and bring fiscal concerns back to the fore, giving investors a big reason to take profits.

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That could prove even more the case for the market’s riskier stocks, said Dennis Debusschere of 22V Research LLC. A gauge of companies with the highest short interest is up 7% this month following a 16% jump in June, outshining the broader market.

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However, “this is unlikely to continue short-term, not with inflation expectations increasing and tail risk to higher yields increasing because of policy risk,” he said. 

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Gamed Out

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The data is already expected to come in higher than the prior print, with a headline 0.3% month-over-month increase forecast by economists surveyed by Bloomberg — up from 0.1% for May. The core June reading, excluding food and energy costs, is also estimated to rise 0.3%, more than the 0.1% in the previous period, according to the median estimate.

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In gaming out CPI-day scenarios, JPMorgan Chase & Co. traders say the S&P 500 could drop up to 2% on Tuesday if the core monthly reading exceeds 0.37%, though they place only 5% odds on that happening. 

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The most likely scenario laid out by the team sees core CPI rising by between 0.28% and 0.32% from the month before, with the S&P 500 climbing anywhere between 0.25% and 0.75% in such an outcome. In the best-case scenario, also with 5% odds, a core month-over-month reading below 0.23% sparks a rally of up to 2%.

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Andrew Tyler, the bank’s head of global market intelligence, said that higher consumer prices are likely coming. However, “it seems that we are at least a month away from having a print whose magnitude may spook the market,” he said. 

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—With assistance from Jessica Menton.

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