U.S. stock traders ignore inflation risk exposure; tonight's CPI may trigger expectation differential trading

The Zhitong Finance APP noted that stock market traders seem indifferent to the potentially higher-than-expected inflation data that may be released on Tuesday. This complacency puts them in a precarious position—if President Trump’s trade war drives up consumer prices in the U.S., the market could face a shock.

Data compiled by Citigroup shows that bets in the options market indicate traders expect the S&P 500 index to fluctuate by 0.6% after the June CPI data is released tonight. This is roughly in line with the market fluctuations on the previous two CPI announcement days that were below expectations, but significantly lower than the average actual fluctuation of 0.9% on such announcement days over the past year.

Recent mild inflation data has propelled a strong rebound in the S&P 500 index, while also fueling a speculative frenzy in high-risk areas of the market. However, economists warn that it is only a matter of time before tariffs push consumer prices higher—bond investors have clearly taken note of this risk, while the stock market remains unfazed.

"This month, bond yields have continued to rise, indicating that fixed-income traders are alert to this risk," said Matt Maley, chief market strategist at Miller Tabak & Co. "But stock traders are completely ignoring the possibility that new tariffs could trigger rising inflation. If the data comes in higher than expected, the stock market will face unexpected turbulence."

The market's reaction to potential overheating inflation will test the resilience of the current rally. Since the low on April 8, the S&P 500 index has risen about 25%, and even with Trump threatening new tariffs, the stock market remains steadfast.

If inflation shows signs of accelerating again, it would weaken the rationale for the Federal Reserve to cut interest rates in the coming months and shift fiscal concerns back into focus, which would serve as a significant incentive for investors to take profits.

Dennis Debusschere of 22V Research LLC pointed out that high-risk stocks may face greater pressure. The index of companies with the highest short interest has risen 7% this month, continuing to outperform the market after soaring 16% in June. "But this situation is unlikely to last, as rising inflation expectations and policy risks lead to increased tail risks for yields, which may reverse the short-term trend," he added.

Data Expectations

The market generally expects this data to be higher than the previous value. The median forecast from a Bloomberg survey of economists indicates that the overall CPI for June is expected to rise by 0.3% month-on-month (compared to 0.1% in May). The core CPI, excluding food and energy, is also expected to rise by 0.3%, up from the previous value of 0.1%.

JP Morgan's CPI Daily S&P 500 Index Scenario

The CPI scenario simulated by JP Morgan traders shows that if the core CPI month-on-month increase exceeds 0.37%, the S&P 500 index could drop by 2% on Tuesday, but the probability of this scenario occurring is only 5%. The most likely scenario is a core CPI month-on-month increase of 0.28%-0.32%, corresponding to a 0.25%-0.75% increase in the S&P 500 index. The best-case scenario (also with a 5% probability) is a core CPI month-on-month increase of less than 0.23%, which would trigger a rebound of up to 2%.

Andrew Taylor, the global market intelligence head at the bank, stated that rising consumer prices have become inevitable, but "data that could panic the market will not appear for at least another month."