Brace for stock-market volatility this week if inflation comes in hot after the September jobs report, BofA says

• A blockbuster jobs report raises the stakes for upcoming inflation data, BofA analysts say.
• The analyst predicted that an upside surprise to September CPI would stoke fresh volatility.

The September jobs report was good news, but it gives investors more reason to brace for the next inflation reading, Bank of America analysts say.

The analysts say last week's blockbuster jobs report puts more pressure on this week's consumer price index data, with a big surprise to the upside now more likely to usher in a wave of market volatility. They say the CPI reading, due Thursday, is "no longer a 'non-event.'"

"Following the blowout jobs report last Friday, we believe the importance of CPI this week has risen," the analysts said in a Sunday note. "A sizeable surprise could bring uncertainty on the easing cycle and more volatility into the market."

They note that options are pricing in a 109 basis point move, or a little over 1%, in the S&P 500 on Thursday when CPI is released, compared to forecasts of a 91 basis point move last week. That would surpass the three-month average of a 70 basis point move on the day of a CPI release, and a move of that size would be the largest swing tied to a CPI report since May.

On the bright side, the analysts say that stocks can withstand a slight upside surprise if it is tied to strong macro data.

"Good news is good news for stocks as long as inflation doesn't flare up again," the analysts said, adding that historically, stocks and rates have moved higher when inflation moves lower, and lower when inflation follows an upward trajectory.

Economists forecast the CPI report will show inflation continued to cool last month, rising 2.3% year-over-year compared to 2.5% in August.

As inflation has edged back toward the Fed's 2% target, the central bank has grown increasingly focused on the labor market after years of fighting inflation. That pivot was behind the central bank's decision to deliver a jumbo 50 basis point rate cut last month, the first cut in four years.

However, with the blockbuster September jobs report, some economists say inflation is still a concern. If this week's CPI data surprises to the upside, the Fed could be forced to turn its attention back toward pricing pressures in the economy.

"CPI for September will be a key data release. If prices rise faster than expected on top of the stronger labor data, chances for the Fed to skip the November meeting will increase," UBS economist Brian Rose said in a Friday note.

The odds of a 50 basis point rate cut from the Fed next month slipped from 33% to zero following the release of the September jobs report, according to the CME FedWatch tool. Thursday's CPI reading will thus be a key indicator as investors anticipate the Fed's next move.

The September jobs report blew past forecasts, with 254,000 nonfarm payrolls added compared to expectations of 150,000. The unemployment rate dipped from 4.2% to 4.1%.