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Markets eye US inflation report due later today, Fed policy in focus

 

Stocks Advanced Last Week  

The FTSE 100 index continued to make new highs and traded mildly higher this morning above 8,400. The Dow Jones rose 2% for the week, and there were gains for the S&P 500 and Nasdaq. The Dow rise, however, was highly dependent on several stocks  – Goldman Sachs hit a record on Friday and is up 17% in the last four weeks – accounting for a third of DJIA’s rally during that period.  

Friday’s consumer sentiment survey from the US was weak. The 13% decline took it to the lowest in six months. Year-ahead inflation expectations rose from 3.2% last month to 3.5%.

 

Chinese Inflation

Overnight, China’s consumer inflation rose for a third month in a row, but producer prices fell again. PPI slid 2.5%. China’s CPI inflation rose 0.3% year-on-year in April, pointing to improving domestic demand, but the PPI slid 2.5%.  

However, data showed soft credit demand, which sent Chinese equities lower for the session. Meanwhile, the PBOC is commencing a major bond-selling operation designed to stimulate the economy.

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More Interest Rate Hikes?

 How tight is tight? Dallas Federal Reserve President Lorie Logan said it's not clear if monetary policy is tight enough. “There are also important upside risks to inflation that are on my mind, and I think there's also uncertainties about how restrictive policy is and whether it's sufficiently restrictive to keep us on this path,” she said on Friday.  

 

US Inflation Data

Key US inflation data might give her an answer. US inflation, as measured by the Consumer Price Index (CPI), rose to 3.5% in the year to March, the third hot CPI print in a row, forcing traders to slash bets on Federal Reserve interest rate cuts. Core US inflation also rose more than expected, rising to 2.8% year-on-year.  

The data for April will be crucial to how markets see the Fed progressing. Goods inflation is expected to decline a bit, but core services inflation will likely remain a little too hot for the Fed’s liking. CPI for April is seen at +0.3% month-on-month, ticking down to 3.4% YoY. Despite the resilience of US inflation, the message from the Fed remains one of easing to come – cuts are in the mail.  

 stifel-width-1200-format-webp.jpg

 

Federal Reserve to Push Back Cuts Even Further?  

It’s a quiet start to the week and all attention is on the US CPI later in the week – take a chill pill.

Here is Stifel on the effects of the US inflation report on interest rate forecasts:  

“The next 500 points for the S&P 500 are down... the Fed already harvested all the normal post-recession disinflation we would expect. As a result, the sustained 2% Core PCE inflation the Fed seeks is a pipe dream ... we expect Fed rate cuts to be pushed back further, causing a middle quarters correction for equities.”  

 Meanwhile, on Friday, the final CPI inflation data for the Eurozone is expected to show disinflation easing, but it’s unlikely to be anything significant enough to prevent the European Central Bank from cutting rates in June.    

 

Crude Oil Rallies

 Crude oil rallied off our 50% retracement level after declining quite sharply on Friday.

At the time of writing on Monday, May 13, the continuous contract for Brent crude, the international oil benchmark, was trading at $83.09, up close to 0.4% on the day.  

The continuous contract for US benchmark West Texas Intermediate (WTI) was up 0.41% at $78.58.


When considering shares, indices, forex (foreign exchange) and commodities for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss.  

Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.

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