JPMorgan mapped out how the S&P 500 could move across a range of Federal Reserve outcomes and put half the probability on a hawkish hold. That base case leaves the index between up 25 basis points and down 50 basis points. A 25-basis-point hike, given 20% odds, is the outcome the bank says would push the index down 1.5% to 2%.
JPMorgan told clients in a note that Wednesday's Federal Reserve decision is the most important catalyst during regular trading hours. In its scenario analysis the bank assigned a 50% probability to a hawkish hold, its base case, with the S&P 500 landing anywhere from up 25 basis points to down 50 basis points.
A dovish hold comes next. That path carries a 28% chance and is what JPMorgan called "the best outcome for stocks", lifting the index 50 basis points to 1%.
A hike is the tail the bank discounts
On the hawkish side, JPMorgan put a 20% probability on a 25-basis-point hike, which it said would send the S&P 500 down 1.5% to 2%, with the Nasdaq 100 falling harder. It assigned just 1% each to a 50-basis-point hike and an outright cut.
The bank's economist Michael Feroli expects the Fed to leave rates on hold, with at least two hawkish dissents including from Hammack and Logan. Its Market Intelligence desk said the chance of a hike is lower than the market implies, at about 30%, citing U.S. GDP growth near trend with upside risks and elevated inflation that it does not see as likely to explode higher. The desk added that June looked more appropriate for a hike, when CPI was above the fed funds rate.
Options price a smaller move than a CPI day
Traders are positioned for a contained session. Options expiring July 29 are pricing a move of roughly 0.8%, based on July 28 prices, below the roughly 1.1% typically priced into recent CPI events.
Futures pointed the same way before the open. Contracts tracking the S&P 500 and the Nasdaq 100 rose 0.24% and 0.27% respectively, according to Reuters. Traders largely expect the central bank to hold rates steady while pricing in at least one hike by the end of the year.
Several of the central bank's policymakers have openly expressed their concern about rising prices.
Sources: Investing.com, Reuters
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