S&P 500 Rises after December’s CPI Report: How to Trade the Move?
US Consumer Prices and Market Reaction
The S&P 500 (/ES) was about 0.4% higher through mid-day trading in New York after a U.S. inflation report showed that price pressures in the economy are cooling. U.S. consumer prices increased by 6.5% in December from a year before, according to the U.S. Bureau of Labor Statistics. That was the lowest rate of inflation since October 2021.
Analysts and markets anticipated the lower inflation reading, which has seen a risk-on tone in equities leading up to this morning’s report. For the week, the S&P 500 is up around 2.35%, which explains the subdued reaction to the data—traders already largely priced this in.
Although the report cooled market-based bets on further rate hikes from the Federal Reserve, we can likely expect Fed officials to push back on the market’s dovish interpretation. Fed funds futures show that rates topping at the 4.75% - 5.00% range is the most likely outcome this year, with chances for a cut increasing significantly later this year.
Trading S&P 500 Post-CPI Report
Today’s price increase and passing of the CPI report, which presented a risk event, has sapped volatility in the index. Opening a short-vol trade is probably not the best approach currently. But next week presents several opportunities that may influence Fed bets and induce some price swings in the market, thereby increasing volatility.
On Wednesday, US retail sales for December are due along with the producer price index for December. Both of those events can cause shifts in market pricing for rates. Retail sales are expected to fall 0.2% from the prior month, while PPI is seen increasing 0.2% for the same period. If these economic data points cross the wires above analysts’ expectations, it may cause increased volatility.
That said, if you’re confident that these measures may impress, a short butterfly presents a delta-neutral trade, which may be the safest way to play that thesis. While this trade may not offer the greatest profit potential, it does offer a high probability of profit (POP). The chart below demonstrates the trade dynamics of a short call butterfly on /ES futures.
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