BofA : CPI Surprise May Shake Year-End U.S. Stock Performance

Insights - Bank of America (BofA) suggests a December Fed rate cut is nearly certain, but November CPI data, set for release on Wednesday (Dec. 11), will play a critical role in influencing the next rate decision and the second-half December market outlook.

The market expects headline inflation to rise slightly from 2.6% to 2.7%, with core CPI steady at 3.2%-3.3%. Options pricing suggests minimal S&P 500 volatility (±0.64%), the smallest CPI-related movement since inflation surged in 2021.

However, BofA warns a surprise CPI increase could significantly impact equities, as Bloomberg's Inflation Surprise Index points to the largest potential upside surprise since May.

BofA highlights two key events shaping the year-end market: the CPI report and the FOMC meeting. Softer data could fuel a year-end rally, with December’s second half typically delivering a 1% average S&P 500 gain. Stronger data may heighten volatility, especially following the 5% post-election rally.

The CPI report will also influence the Fed’s rate path. Higher-than-expected inflation could increase the chances of a rate cut pause, though BofA expects no change to December’s planned cut.

Currently, markets price an 89.5% chance of a 25-basis-point cut in December, with no January action expected. Fed Governor Michelle Bowman recently reiterated inflation risks and labor market uncertainties, signaling a cautious approach to rate cuts.