(Bloomberg) -- Thursday’s widely watched US inflation data are likely to come in cooler than expected, helping stocks extend a bear-market rally, according to JPMorgan Chase & Co.’s sales and trading desk.  

While consensus expects December’s consumer price index to slide to a 6.5% annualized pace, the bank’s team including Andrew Tyler sees an almost two-in-three chance for the data to arrive within 10 basis points of the estimate, with a bias to the soft side. Since investors are largely defensively positioned, they argue, any evidence that the Federal Reserve’s inflation-fighting campaign is working will spark a rush to unwind bearish positions. In that case, they see the S&P 500 rising 1.5% to 2% over the session. 

“This should aid the nascent bear rally, but we remain cautious as long as the Fed remains active with its tightening cycle,” Tyler wrote in a note to clients Tuesday. “Our scenario analysis is skewed bullishly based upon positioning that could cause an overreaction via short-covering on a dovish print.”

Should inflation fall below 6.4% — a scenario that the team assigns a 20% probability — the equity benchmark would jump 3% to 3.5%. For the bond market, moves are expected to be muted unless the data show a material miss, dropping to 6% or lower. A repricing of expectations for a pause in the tightening cycle at the Fed’s March meeting seems likely only if CPI prints below 4.5% to 5%, their analysis shows. 

On the flip side, a CPI reading above 6.6% is expected to hit risky assets with bond yields rising along the curve. And a reading above 6.8% threatens to shock investors with what the team calls “a tail event.”

CPI days have become a source of market volatility in the past year as the Fed embarked on the most aggressive tightening in decades to tame runaway inflation. The S&P 500 swung an average of 1.9% in the first-day reaction to the data in 2022 — almost three times as big as the move in the prior five years, data compiled by Bloomberg show. 

Predicting inflation and financial markets has been an almost futile exercise in the post-pandemic world. Still, JPMorgan’s analysis offers a lens into the sentiment ahead of the CPI print. Tyler and his colleagues caution that any stock rallies may not last, though traders can take advantage of a volatile market to make quick money. 

“Short-term investors may consider playing a short-term rally with various parts of the tech complex, especially the heavily shorted, unprofitable areas,” they wrote.

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