JPMorgan's trading desk lays out 6 scenarios for tomorrow's inflation report, and how the stock market will react to each of them

• The Wednesday release of the April CPI report has the potential to shake up the stock market.
• A cool inflation report would bode well for interest rate cuts from the Fed and vice versa if it's hotter than expected.
• JPMorgan laid out six scenarios for April CPI and how the stock market could react to each. 

JPMorgan's trading desk has a thorough overview of the potential outcomes for the Wednesday morning release of the April consumer price index report.

The coming inflation report is set to market-shaking because it will help investors determine when the Federal Reserve might move forward with interest rate cuts. A cooler-than-expected CPI report would suggest interest rate cuts are close at hand, whereas higher-than-expected inflation in April would likely push timelines out further, possibly even raising the odds that the central bank doesn't loosen policy at all this year. 

At the start of the year, the market was pricing in as many as seven interest rate cuts, but that has dwindled to just two rate cuts before year-end.

The median economist forecast suggests core CPI will show a 0.3% increase in April, slightly below the March reading of 0.4%.

Here's what JPMorgan sees for the stock market based on six scenarios for April inflation data. 

CPI is above 0.4%

Chance of happening: 10%
S&P 500 movement: 1.75% to 2.5% decline

"The first tail-risk scenario that would likely show smaller than expected disinflation in shelter prices and perhaps a reversal of the drags created by vehicle prices and public transportation price. Look for a sell-off across all risk assets and investors may find sanctuary in commodity plays with Defensives outperforming on the move lower," JPMorgan's Andrew Tyler said.

CPI is between 0.35% and 0.40%

Chance of happening: 30%
S&P 500 movement: 0.5% to 1.25% decline

"Given market pricing and Powell's comments, this outcome maybe looked through over the course of several days, but I think we still see stocks fall as bond yields move higher, reducing the probability of 2024 rate cuts," Tyler said.

"Ultimately, this scenario does not alter the investment hypothesis but may create a temporary soft patch that could be very short-term depending on the outcome of AI-related catalysts this week and next."

CPI is between 0.30% and 0.35%

Chance of happening: 40%
S&P 500 movement: 0.5% loss to a 1% gain

"OER and Rent inflation remain elevated and thus it will be difficult to see a material softening in inflation, both headline and core, until we witness stronger disinflation. To state the obvious, the closer the print is to the lower bound the stronger the positive reaction especially if we see a sub-0.30% print that rounds up to 0.3%," Tyler said.

CPI is between 0.25% and 0.30%

Chance of happening: 10%
S&P 500 movement: 1% to 1.5% gain

"The first potential positive tail-risk, most likely achieved via a decline in shelter inflation. This positive tail could trigger a material rotation within Equities and could look very similar to Nov/Dec 2023, which was an 'Everything Rally' with SMid-caps outperforming," Tyler said.

CPI is between 0.20% and 0.25%

Chance of happening: 7.5%
S&P 500 movement: 1.5% to 2% gain

"We would need to see core goods decline alongside softer shelter inflation. Given the China PPI print, a decline in core goods feels more likely but would still not be enough to witness this scenario. Expect a strong decline in bond yields as the bond market puts a July cut back on the table. Equities and Credit would benefit as the Goldilocks returns," JPMorgan said.

CPI is below 0.20%

Chance of happening: 2.5%
S&P 500 movement: 2% to 2.5% gain

"The last tail-risk scenario, we could even see June rate cut bets return as Immaculate Disinflation returns, a quarter lagged. Thinking about this through the 'it's too good to be true' lens, I do wonder if some investors would thus assume the 24Q1 GDP miss has morphed into a stronger economic growth slowdown and that this inflation miss is the proverbial canary in the coal mine. If yes, then any gains would give way to a choppier market as we await the next batch of growth data," Tyler said.