PPI and CPI on Deck This Week: How Does the Nasdaq-100 Reaction to Inflation Data?

As the 10-year rate approaches 5%, the markets are very interest rate focused, and a major driver of rates is inflation. This coming week we get two pieces of inflation data with the Producer Price Index (PPI) released Tuesday before the market open, followed by the Consumer Price Index (CPI) coming out Wednesday before the open.

Technology stocks and by association the Nasdaq-100 (NDX) are very sensitive to interest rates. A higher interest rate environment can create a headwind for technology stocks as their cost of capital rises, reducing profitability. Also, a higher interest rate environment makes life more difficult for consumers resulting in slower sales for discretionary products.

PPI – Tuesday Before The Open

The average NDX price change on PPI day in 2024 was +/-0.83%. That figure is lower than the average change for all days in 2024 of +/-0.86%. The past couple of reports have resulted in NDX losing value, but slightly less than the average reaction.

Data Sources: Bloomberg & Author Calculations

Despite the average price change on PPI falling below the average NDX change for all days, the 1-day at-the-money (ATM) straddle underpriced the subsequent move seven of twelve reports in 2024. A consistent buyer of that straddle, who held it through the close on PPI day would realize a gain of 249.95 points.

Data Sources: Bloomberg & Author Calculations

CPI – Wednesday Before The Open

CPI tends to get more press coverage than PPI which may be due to the market reactions being more volatility for CPI than PPI. The average NDX price change on CPI day in 2024 was +/-1.21%.

Data Sources: Bloomberg & Author Calculations

Despite the dramatic difference for NDX price changes on PPI and CPI days, ATM straddle performance is strikingly similar. Like NDX on PPI days, the ATM straddle underpriced NDX price changes seven of twelve times in 2024. This figure is the same for both PPI and CPI days. Also, the net result for an NDX straddle buyer on CPI day is a gain of 256.71 points, very close to the performance on PPI days.

Data Sources: Bloomberg & Author Calculations

The difficult part of offering a preview to option price action around events like earnings or major economic releases is not knowing what the market is pricing in anticipation of the news release. For PPI, the expectation is that the ATM straddle pricing will be in line with an average trading day, based on historical figures. CPI, on the other hand, may bring elevated NDX option premiums due to the bit outlier move in December.