April CPI Data Could Unleash Stock Market Turbulence—Here’s the Critical Level

The stock market has rebounded in May, nearing record territory after April’s pullback. The upcoming April inflation data, due Wednesday, is seen as a potential catalyst for either new highs or another decline.

Tom Essaye, founder of Sevens Report Research, analyzed the potential “good, bad, and ugly” outcomes for the April consumer-price index (CPI) reading.

Rates traders started 2024 expecting the Federal Reserve to cut rates six or more times by year-end. However, hotter-than-expected CPI reports have reduced these expectations to about two cuts this year.

Despite April’s dip, stocks recovered after Fed Chair Jerome Powell suggested on May 1 that a rate hike wasn’t imminent. The S&P 500 is up over 9% year-to-date, close to its record high. The Dow Jones is less than 600 points from the 40,000 mark, and the Nasdaq has risen over 9% in 2024.

The April CPI reading is crucial. Economists forecast a 0.4% monthly rise, slowing the year-over-year rate to 3.4% from 3.5% in March. Core CPI, excluding food and energy, is expected to rise by 0.3% monthly and slow to 3.6% annually from 3.8%.

Essaye identifies three scenarios:

Ugly: A core reading of 3.9% or higher would likely trigger a “solid selloff,” reinforcing the idea that inflation is persistent and rates will stay high. This could erase recent gains, with the S&P 500 potentially dropping 1% or more, all sectors declining, and the 10-year Treasury yield rising by 10-15 basis points. The U.S. Dollar Index might exceed 106.

Not So Great: A core reading of 3.7%-3.8% would probably cause stocks to fall and Treasury yields to rise. This would indicate persistent price pressures, leading to a “mild selloff,” with tech and cyclical stocks outperforming defensive plays.

Good: A core reading at or below 3.6% would likely bring relief, suggesting a decline in core inflation. This could push stocks to new highs, led by sectors outside the “supercap” tech names. Treasury yields might fall sharply, and the dollar index could weaken as investors anticipate more rate cuts in 2024.