Recent market volatility due to escalating tensions in the Middle East has once again put inflation at the center of the U.S. stock market this week as investors await the release of the September Consumer Price Index report on Thursday morning.
Stocks should be able to withstand a small upside surprise in inflation given improving macroeconomic indicators, but a “substantial surprise” in CPI reflects uncertainty over the Federal Reserve's easing cycle, according to BofA Global Research. This could lead to further volatility in the market.
“We believe the importance of CPI has increased this week following last Friday's explosive jobs report,” a team of strategists led by Oson Kwon, equity and quantitative strategist at BofA Global, said in a note Monday. .
In fact, the options market on Tuesday was pricing in a 90 basis point increase in the S&P 500 index this Thursday, which is “significant,” said Option Research & Technology Services President and Founder. Matt Amberson told MarketWatch.
Meanwhile, the recent rise in Wall Street's “fear gauge'' (VIX) is due to the fact that CPI-centered stock price movements have led to “the S&P 500 dancing at all-time highs and credit spreads at two-year lows''. “It could be even bigger than that,” Doug said. Fincher, portfolio manager at Ionic Capital Management, said:
“There's a lot of optimism priced into the market, and it could be impacted by the high-profile numbers on Thursday,” he told MarketWatch in a phone interview.
