Stock market faces inflation test Wednesday: Here are ‘good, bad and ugly’ scenarios

Expectation for U.S. inflation have fallen over the past month thanks largely to the drop in industrial and agricultural commodity prices. This trend has shown up in the Federal Reserve Bank of New York’s Survey of Consumer Expectations, which saw expectations for inflation both three years and five years from now both decline in June.

It has also shown up in popular market-based indicators, like the five-year five-year forward inflation expectation rate, a popular gauge of long-term inflation expectations. Last week, the gauge touched its lowest level since late February, according to data from the St. Louis Fed.

Despite these recent developments, stock-market analysts largely expect Wednesday’s consumer-price index to have serious ramifications for the market, even though it’s a “backward-looking” report that won’t reflect the latest moves in commodity prices.

See: U.S. inflation is still rising. Can it reach 9%?

As inflation has risen over the past year to become the top bugbear for markets, U.S. stocks and Treasury yields have seen large moves on days when CPI data have been released. The S&P 500 index closed nearly 2% lower on June 10 and May 11 after data from May and April were released, respectively.

And as U.S. stocks continue to climb off of last month’s lows, investors are understandably nervous about the possibility that Wednesday’s number could delay the latest bear-market rally.

So in the spirit of offering some guidance, Tom Essaye, an experienced trader and author of the Sevens Report, has shared a quick guide for how stocks might react to Wednesday’s June CPI data, which will be released at 8:30 Eastern Time.

A ‘good’ number

The best scenario for stocks would be if Wednesday’s reading on headline inflation comes in below the market’s expectations.

Ahead of Wednesday’s report, the consensus expectation from FactSet is for a rise in headline inflation to 8.8% year-on-year. In May headline CPI inflation was 8.6%, the highest number in four decades.

According to Essaye, a…


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