The September jobs report presents a positive outlook, but it has also intensified investor focus on the forthcoming inflation data, according to analysts at Bank of America.
In a note released Sunday, the analysts indicated that the robust jobs report from last week has heightened expectations for this week’s consumer price index (CPI) data. They caution that a significant upside surprise in the CPI could trigger increased market volatility. The CPI reading, scheduled for release on Thursday, is now considered “no longer a ‘non-event.'”
“Following the blowout jobs report last Friday, we believe the importance of CPI this week has risen,” the analysts stated. “A sizeable surprise could bring uncertainty regarding the easing cycle and inject more volatility into the market.”
Options trading is currently pricing in a 109 basis point move, or just over 1%, in the S&P 500 for Thursday’s CPI release, up from last week’s forecast of a 91 basis point move. This anticipated shift would exceed the three-month average of a 70 basis point change associated with a CPI report and would represent the largest fluctuation tied to a CPI release since May.
On a positive note, the analysts believe stocks may endure a modest upside surprise if linked to robust macroeconomic data. “Good news is good news for stocks, as long as inflation doesn’t flare up again,” they remarked, noting that historically, stock prices and interest rates tend to rise when inflation declines and fall when inflation rises.
Economists predict that the upcoming CPI report will reflect continued cooling in inflation, showing a 2.3% year-over-year increase compared to 2.5% in August.
As inflation edges closer to the Federal Reserve’s 2% target, the central bank has increasingly shifted its focus to the labor market after years of combating rising prices. This pivot was evident in the Fed’s decision to implement a substantial 50 basis point rate cut last month, marking its first cut in four years.
However, following the impressive September jobs report, some economists caution that inflation remains a significant concern. If the CPI data surprises to the upside, the Fed may be compelled to redirect its attention toward pricing pressures in the economy.
“CPI for September will be a key data release,” UBS economist Brian Rose said in a note on Friday. “If prices rise faster than expected in conjunction with the strong labor data, the chances of the Fed skipping the November meeting will increase.”
According to the CME FedWatch tool, the likelihood of a 50 basis point rate cut by the Fed next month has diminished from 33% to zero following the release of the September jobs report. Thus, Thursday’s CPI reading will serve as a critical indicator for investors anticipating the Fed’s next moves.
The September jobs report significantly exceeded forecasts, with 254,000 nonfarm payrolls added compared to the expected 150,000. The unemployment rate also fell from 4.2% to 4.1%.
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