Wall Street draws plans for different inflation scenarios

Whether the peace can last will depend a lot on Tuesday’s consumer price index.

Consensus is growing that a softer reading is likely to reinvigorate the new year’s rally in stocks, while something stronger could extend last week’s selloff in risky assets. Stocks and bonds have risen sharply since October, when inflation reversed a two-year trend in which CPI readings were stronger than expected.

Powell it has repeatedly dismissed a simultaneous easing of financial conditions despite doubts about whether it harms its goal of slowing demand and reining in inflation.

“I don’t think this Fed anticipated that financial conditions would ease as much as they have, but as long as inflation remains on a downward trend, they won’t be opposed.“, wrote Tony Pasquarielloa partner at Goldman Sachs Group Inc., in a note Friday.

Which part of consumer prices investors will focus on and how they will place their bets in various scenarios is where some of the differences lie.

The JPMorgan Chase & Co. team focuses on the annual change in the consumer price index. Economists were forecasting a drop to 6.2% in January from 6.5% the previous month.

At Morgan Stanley, they focus on the month-on-month change, in which the bank’s economists project an increase of 0.4%.

Forecasting inflation has been nearly impossible post-pandemic, not to mention market reactions to it. If anything, the two-company exercise offers insight into the risks investors face.

In JPMorganThe trade team, which includes Andrew Tyler, anticipates a nearly two in three chance that the CPI data will be within 20 basis points of the economists’ median estimate.

Last week, financial assets — from stocks to bonds — halted their New Year’s rebound as Fed officials emphasized the need to keep raising interest rates amid continued price pressures.

Faced with harsh comments, traders increased bets on the top rate of the fed to around 5.2%, from less than 5% earlier this month.