JPMorgan's trading department warned on Tuesday that stock investors should be prepared for a new round of volatility this week after a long calm.

According to Andrew Tyler, head of US market intelligence at JPMorgan's trading department, the price of at-the-money straddle options expiring on Thursday suggests that the options market is betting on a 0.9% up-and-down swing in the S&P 500 index before then. The latest consumer price index (CPI) will be released before these options expire, and the data could prompt traders to bet that easing inflation will push the Federal Reserve to cut interest rates twice in 2024.

Tyler and his team wrote in a note to clients on Tuesday that "We note that several former Fed officials have hinted that September is a good time to taper. Given this, we are still tactically bullish, but with slightly less conviction."

Policymakers generally believe that core CPI, which excludes the more volatile food and energy components, is a better measure of underlying inflation than headline inflation. In May, core CPI rose by 0.16% month-on-month, the weakest reading since August 2021.

Core CPI is expected to rise by 0.2% month-on-month in June. Tyler believes that if the final reading exceeds 0.3%, it is likely to trigger selling of risky assets, with the S&P 500 index falling 1.25% to 2.5%. But he thinks the probability of this happening is only 2.5%.

In addition, if core CPI rises between 0.15% and 0.20% month-on-month (which JPMorgan's trading department considers the most likely scenario), the S&P 500 index is expected to rise by 0.5% to 1%; if it is between 0.20% and 0.25%, the stock market may initially react negatively, but the decline in bond yields will eventually support the stock market, pushing the S&P 500 index up by 0.25% to 0.75%.

He added that any reading below 0.1% would be considered extremely favorable for the stock market and could trigger some calls for a rate cut in July, leading to a rebound of 1% to 1.75% in the S&P 500 index.

As the CPI report and the Federal Reserve's decision approach, the entire market has been kept volatile. The Cboe Volatility Index (VIX) is currently around 12, close to its 52-week low, far below the level of 20 that initially alarmed traders. The possibility of a rate cut in September is seen as around 70% by the market.

Tyler wrote that "Cooling CPI data will send a positive signal to the market and could deafen the calls for a rate cut in September."

One of the keys to whether inflation can be brought down is housing prices, as this sector has long been a source of inflation stickiness. Any substantial drop in housing prices would be welcome and could signal even greater anti-inflationary forces.

Editor/Emily