Inflation Focus

JP Morgan weighed in yesterday morning (December 12) on the likely trend in inflation. Their note listed the following scenarios for the US consumer price index released this morning:

5% probability — CPI 7.8% or higher — S&P 500 down 4% to 5%

25% probability — CPI 7.5% - 7.7% — S&P 500 down 2.5% to 3.5%

50% probability — CPI 7.2% - 7.4%. — S&P 500 up 2% to 3%

15% probability — CPI 7.0% - 7.2% — “A bullish outcome that could pull terminal rate lower.” — S&P 500 up 4% to 5%

5% probability — CPI 6.9% or lower — “A print here could be the technical end of the bear market...This would give increasing confidence in projections of headline inflation falling [to] 3% in 2023. Further, if inflation is at 3%, irrespective of the labor market conditions, it seems unlikely that the Fed would hold the terminal rate at 5%. Any Fed pivot will rip equities.” — S&P 500 up 8% to 10%

It’s that last scenario that turned heads, even with just a 5% probability assigned.

Turns out, the 15%, 7-7.2% scenario is what has been reported this morning, indicating a further deceleration in inflation. Not surprisingly, European stocks have rallied, the UK pound has hit a 6-month high viz the US dollar, the Canadian dollar has similarly jumped, and stock and bond markets in the US have opened on a tear. For financial markets everywhere, it seems the inflation trend, and hence the size of further interest rate increases, remains the primary focus.