Why April 10 Could Be a Big Day for the Stock Market

The market has been anything but quiet. Earlier this year, stocks struggled to overcome mounting concerns about artificial intelligence (AI) and private credit, among other signs of frothiness.

Then the Iran war triggered a real sell-off, sending the major indexes briefly into correction territory. Since then, the market has bobbed and weaved, largely on headline-driven news about when the conflict could end.

Another potential catalyst for the stock market is fast approaching. Here's why April 10 could be a big day.

A real look at how the war affected inflation

The main issue affecting the market from the Iran war is the closure of the Strait of Hormuz, a narrow body of water between Iran and Oman through which one-fifth of the world's oil flows daily during normal times. While Iran has not closed the passage to all ships, concerns about the conflict have made many tankers reluctant to pass through.

Image source: Getty Images.

Crude oil prices topped $100 on several occasions in March. Many investors expect this surge to push inflation higher. On April 10 at 8:30 a.m. ET, the U.S. Bureau of Labor Statistics (BLS) will release the March Consumer Price Index (CPI) reading, a major inflation gauge for investors. The CPI tracks the prices of a basket of consumer goods and services.

With high oil prices, most economists expect the CPI to surge because of the resulting higher gas prices, which have approached $4 a gallon, are an immediate tax on consumers, and raise costs for businesses and corporations.

Inflation has remained over the Federal Reserve's preferred 2% target for several years now. In February, the CPI rose 0.3% from the prior month and 2.4% year over year (YoY), which was the headline number. Core CPI, which strips out more-volatile food and energy prices, rose 0.2% from the prior month and 2.5% YoY.

Due to the surge in oil prices, the Federal Reserve Bank of Cleveland's Inflation Nowcasting tool projects that the CPI will rise by 0.84% from February and by 3.25% YoY. But core inflation, which excludes energy prices, is expected to rise only 0.2% from February, while headline inflation is projected at 2.60%.

Why this is so important for the market

The Fed's dual mandate is maximum employment and stable consumer prices. However, the dual mandates have been at odds for some time, with the unemployment rate historically low and inflation elevated. The Fed will likely focus on the mandate more in need of monetary policy support.

While the Fed would not want to cut interest rates while inflation remains high, it would consider doing so if the labor market continues to show weakness. However, recent data showed the U.S. economy added 178,000 jobs in March, while the unemployment rate declined slightly to 4.3%. This is a sharp reversal from the 92,000 jobs lost in February.

This should ease some concerns about a looming recession or even imminent stagflation, in which unemployment continues to rise and inflation remains elevated. Stagflation makes the Fed's job extraordinarily difficult because raising interest rates could help achieve one of its mandates while worsening the other. But the strong March jobs report also makes it less likely that the Fed would further cut interest rates in the near term.

Now, investors should keep in mind that the market is pricing in a higher CPI report due to oil prices, so that should be reflected at this point. However, if the CPI or core CPI comes in worse than expected, I suspect the market will not react kindly. If inflation shows signs of easing relative to estimates, the market may bid it up, as lower inflation bolsters the case for interest rate cuts, which often support higher stock prices.

Ultimately, investors should not try to trade on CPI reports. It's impossible to know how the results will come in on April 10, and even harder to know how the market will react. Long-term investors don't need to do anything, but understanding the reasoning behind various market moves can help investors stay calm, avoid rash decisions, and be better positioned to make smart investments in the future.

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