May Inflation Data Will Arrive One Day Ahead Of Fed's Interest Rate Call: How The S&P 500 Could React

The release of the May inflation data on Tuesday morning is eagerly awaited by investors, as it has the potential to significantly influence market sentiment ahead of the two-day Federal Open Market Committee policy meeting and interest rate announcement Wednesday.

What Are Economists Expecting From May CPI Report?

Consensus economist estimates suggest a sharp decline in headline inflation from 4.9% in April to 4.1% in May. On a monthly basis, the Consumer Price Index is expected to show a modest 0.2% increase, slowing down from the 0.4% recorded last month.

Core annual inflation, which excludes energy and food items, is also expected to slightly decrease from 5.5% in April to 5.3% in May. Monthly core inflation is predicted to advance by only 0.4%, continuing the trend observed in 2023.

The Cleveland Fed’s inflation nowcasting slightly exceeds current economists’ projections, anticipating a 0.19% increase in monthly CPI and a 0.45% rise in core CPI, resulting in annual rates of 4.13% and 5.34%, respectively.

Read also: Imminent CPI Report: Pivotal Inflation Showdown Could Halt Fed’s Rate Hikes

How Might the S&P 500 Respond to May CPI Data?

Goldman Sachs has provided insights into the potential reaction of the S&P 500, which is tracked by the SPDR S&P 500 ETF Trust SPY, based on different core CPI prints.

According to Goldman’s analysis:

• If the monthly core CPI is lower than 0.3%, the stock market is expected to rally strongly, with a gain of over 2% for the session.
• A monthly core CPI print between 0.3% and 0.35% could lead to a 1% rally in the S&P 500.
• If the monthly core CPI falls within the range of 0.35% and 0.45% (in line with expectations), the S&P 500 is likely to remain nearly flat for the session.
• A higher-than-expected core CPI between 0.5% and 0.55% could push the S&P 500 index down by 1.5%.
• If the monthly core CPI print exceeds 0.55%, it could send shockwaves through the market, resulting in a significant decline of 2.5% in the S&P 500 index.

Goldman Sachs senior markets advisor Dominic Wilson said a high core CPI print above 0.5% monthly could trigger a larger sell-off than expected, as it would raise concerns about a hike at the upcoming FOMC meeting.

On the other hand, a print below 0.4% could fuel more upside, he said. “It's likely that we see the market worry about central bank hawkishness over the next few days, but we think the pendulum is shifting back towards seeing some inflation relief.”

Goldman Sachs macro analyst Brandon Brown suggests that a 0.55% surge in core CPI could bring June meeting pricing closer to 50-50, versus the current 75-25 split between hold and hike. An in-line or slightly higher-than-expected print (0.4% core) would keep the potential to skip a June rate hike but increases the likelihood of a hike in July. A core CPI print of around 0.3% would cause the market to question the need for additional rate hikes even in July, he said.

Monthly Core CPI	Market Reaction
Less than 0.3%	Strong rally (>2%)
0.3% – 0.35%	1% surge
0.35% – 0.45%	Nearly flat session
0.5% – 0.55%	1.5% decline
Exceeds 0.55%	Sell-off (down 2.5%)

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