Bank of America analysts caution wealth advisors and RIAs to prepare for heightened stock-market volatility this week, driven by the upcoming inflation data following a stronger-than-expected September jobs report.
Last week’s labor market performance, which exceeded forecasts, shifts the focus toward Thursday’s release of the consumer price index (CPI), and any significant upward surprise could introduce substantial market turbulence. The analysts emphasize that, given the blowout in job numbers, CPI can no longer be considered a "non-event."
"We believe the significance of this week’s CPI has increased dramatically after Friday’s jobs report," the analysts note. "A larger-than-expected increase in inflation could disrupt expectations for the easing cycle, fueling more market volatility."
Market indicators support this view, with options markets now pricing in a potential 109 basis point move (just over 1%) in the S&P 500 following Thursday's CPI release, up from last week's forecasted 91 basis points. This would exceed the three-month average daily CPI-related movement of 70 basis points, making it the largest market swing on CPI data since May.
Still, there is a silver lining for RIAs managing client portfolios: the stock market can absorb minor inflationary pressures, especially if supported by strong economic fundamentals.
"Historically, stocks perform well as long as inflation remains contained. If inflation doesn’t spike sharply, good macroeconomic data can actually provide a tailwind for equities," the analysts add. However, they caution that inflation spikes have historically pushed both stocks and rates lower.
Economists predict the CPI will show that inflation cooled further in September, with a year-over-year increase of 2.3%, down from August’s 2.5%. As inflation moves closer to the Federal Reserve’s 2% target, the central bank's focus has shifted more towards labor market conditions, a pivot that led to the recent 50-basis-point rate cut.
However, RIAs should remain cautious. Despite the Fed’s attention on employment, inflation is still a concern after the robust jobs report. Any significant upward surprise in the CPI data could force the Fed to recalibrate its stance on inflation, potentially delaying any further rate cuts.
"CPI will be a pivotal release this week," says UBS economist Brian Rose. "If prices rise faster than expected, especially given the stronger labor data, the Fed may be compelled to maintain its tightening stance at the November meeting."
The September jobs report, which added 254,000 nonfarm payrolls compared to expectations of 150,000, and lowered the unemployment rate from 4.2% to 4.1%, has already affected market expectations. The odds of a 50-basis-point rate cut in November have dropped from 33% to zero following the job data release, according to CME FedWatch. As a result, RIAs will need to closely monitor Thursday’s CPI reading as they gauge the Fed’s next policy move and its potential impact on client portfolios.
