Source: wind
The market has begun to turn its attention to the upcoming consumer price index (CPI), and the impact of the data on inflation expectations may dampen speculation on the path of interest rate hikes, thus bringing respite to the falling market.
Stocks are likely to remain volatile after the extraordinary turmoil in the U.S. as investors await new U.S. inflation data and focus on the direction of U.S. bond yields.
The consumer price index (CPI) for April, due on Wednesday, is an important report for the market. Economists expect inflation to remain high, but it should be slower than March’s 8.5% year-on-year increase. The second inflation report, the Producer Price Index (PPI), which measures wholesale prices, will be released on Thursday.
“I think it’s going to be a hot number, but not as hot as last month,” said Mark Zandi, chief economist at Moody’s Analytics. Zandi expects the month overall The CPI will rise 0.3% and 8.2% year-on-year.
Investors are watching inflation and other key reports that will affect the Fed’s rate hike progress. The Fed raised its target federal funds rate by 0.5 percentage point at its May meeting and signaled that it may continue to raise rates by the same amount. Federal Reserve Chairman Jerome Powell said after the meeting that he expected a “soft landing” for the U.S. economy.
“I think the two big concerns for the market are inflation and how the Fed is going to take tough measures to control it,” said Art Hogan, chief market strategist at National Securities. Hogan said that if the CPI data is in line with expectations, it could bring some stability to the stock and bond markets, as inflation appears to have peaked by then.
The stock market has been volatile over the past week, with large intraday swings. The S&P 500 closed at 4,123, down just 0.2% for the week. The Nasdaq fell 1.5% for the week. The energy sector was by far the best performer, up 10% for the week. REITs were the worst performer, falling more than 3.8%, followed by consumer discretionary, which fell 3.4%.
Stock market investors have also been keeping an eye on the bond market, and bond yields have been rising as bonds have sold off. The 10-year U.S. Treasury yield topped 3 percent for the first time since late 2018. U.S. Treasury yields were at 3.13% on Friday, with rising 10-year yields dampening stocks, especially growth and technology stocks, during their rapid advance.
The yield on the benchmark 10-year Treasury note was around 1.5% at the start of the year. Many lending rates, including mortgages, are tied to interest rates. “If people think inflation is peaking, then the market may think that 10-year yields aren’t necessarily peaking, but that could slow the sell-off,” said Julian Yi, head of equities, derivatives and quantitative strategy at Evercore ISI. Julian Emanuel said.
“The bond market is calling the shots here,” he said. But he expects stocks to be in the process of finding a low. “What we’re seeing is stocks going up and down, and that’s the beginning of the bottoming process.”
Scott Redler, a partner at T3Live.com, believes that if the S&P 500 breaks below its lows, the next stop loss would be 3,850. So far, it appears that every rally that could lead to an oversold rally has been sold. Redler said Microsoft and Apple could have a significant impact on trading next week. If Apple breaks support around $150 and Microsoft breaks below $270 (where Microsoft has held), these two stocks could push the S&P 500 higher. The index dashed below 4,000.
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