We’ve been here before just last week and the hoped-for Fed “pivot” didn’t last very long. The broad-based, blue-chip S&P 500 and the tech-laden Nasdaq 100 indices are both now trading just below critical junctures on charts as traders eye up the most important risk event on the calendar. We used to worry and gear ourselves up for jobs data and the non-farm payrolls report (some of us still do!) But the preeminent data release is now the monthly US consumer price inflation figures which should certainly determine the Fed’s next moves, where bond yields go, and what happens to stock markets the world over.
We may actually get a mixed set of numbers with divergences between monthly figures and also the headline and core readings. Falling energy prices are expected to pull down the headline number while shelter costs will keep the core readings elevated. But unless we get a headline print with a seven handle, then it is probably fairly safe to assume that money markets will lock in a fourth consecutive jumbo-sized 75-basis point rate hike by the Fed at its meeting in early November. That is now pretty much priced in by money markets.
Market reaction to inflation
The form guide points to a higher core CPI with ten of the last twelve prints above consensus. This will not be good news for equity bulls hoping those key support levels can do a job once more. If inflation stays high for longer, the central bank is more likely to continue with its aggressive path of rate hikes, even raising the chances of five straight three-quarter point hikes in December.
But it does seem like the market is positioned for big numbers, which means the “shock” of a softer figure could see a risk rally and stock indices bouncing once again. This would in effect catch the market out, even if the data is still way above the Fed’s inflation target of 2%.
Several of the major stock indices didn’t move much yesterday in readiness for today’s data release. Market’s never go down in a straight line for long and that is why it is always worth paying attention to significant support and resistance levels. The mid-June lows are the key levels many traders are focused on. For the benchmark S&P 500, a strong weekly close below 3636 looks crucial for more downside. The wider timeframe 200-week simple moving average is also getting a lot of focus at 3599. Lose this and bears will zero in on the halfway point of the pandemic low and all-time high at 3505. Traders will also be watching US earnings which kicked off this week and how consumers and businesses are handling higher prices and rising borrowing costs.
Similarly in the tech-heavy Nasdaq 100, the bear channel from the August high remains intact with the mid-June low at 11,037. Prices made fresh two-year lows yesterday at 10,716 but again the weekly close will be key. Tech stocks have taken the brunt of the selling this year due to spiking interest rates. Rising rates expose their relatively high valuations and raise their cost of capital. This week’s chip tech curb by the US on exports to China has also hurt semiconductor stocks.