Are US equity investors dependent on favorable inflation data to sustain the market rally? Yes, with the S&P 500 surpassing the 5,000 mark, investors are keenly awaiting inflation and retail sales data to maintain the upward trajectory as corporate earnings influence wanes and Federal Reserve officials weigh in throughout the week.
U.S. equity markets have recently witnessed a surge, with the S&P 500 climbing past the 5,000 threshold for the first time, a milestone for investors. The focus now shifts to economic indicators, with inflation figures and retail sales data poised to set the tone for the market’s direction in the coming week.
Analysts anticipate that the Consumer Price Index (CPI) will show a month-over-month rise of 0.2% for January. This projection aligns with the Bloomberg consensus and maintains the average increase experienced in 2023, as reported by Daiwa Capital. The underlying strength in services prices, propelled by persistent inflationary pressures from housing costs, will likely be a significant contributing factor to the CPI’s performance.
Core CPI is also expected to experience a month-over-month increase of 0.3%. However, the annual pace is projected to have declined by 20 basis points to 3.7% year-over-year, marking the lowest rate since April 2021. Meanwhile, headline inflation is forecasted to fall by 50 basis points to 2.9% year-over-year.
An additional layer of insight will be provided on Friday, with the release of producer price inflation data for January and the University of Michigan’s survey capturing consumer inflation expectations for the next one and five years.
The week is also set to reveal key data points on the health of the U.S. economy through January’s retail sales and industrial production reports. Adding to the mix, a stream of commentary from Federal Reserve officials scattered throughout the week is expected to offer perspectives on the economic landscape and the potential trajectory of interest rates.
Market sentiment has been gradually adjusting to the idea that a Federal Reserve rate hike of 25 basis points in March might not be forthcoming, with the CME Group’s FedWatch Tool indicating just an 18% probability of such an increase. Conversely, traders are leaning towards the possibility of a rate cut in May, with a 53% probability forecasted, and another reduction in June is seen as a 46% likelihood.
As the week unfolds, earnings reports from major corporations such as Arista Networks (ANET), Coca-Cola Company (KO), Shopify (SHOP), Airbnb (ABNB), Cisco Systems (CSCO), Applied Materials (AMAT), and Deere & Company (DEER) will also draw attention. These financial disclosures, coupled with the anticipated economic data and Federal Reserve insights, will likely be pivotal in shaping investor sentiment and the future course of U.S. equities.
Investor optimism, underpinned by recent market performance, now hinges on forthcoming economic reports. The intersection of inflation data, Federal Reserve commentary, and corporate earnings will either bolster confidence or prompt reassessment of the current rally, painting a clear picture of the market’s sustainability in the face of evolving economic dynamics.
What’s your take on this? Let’s know about your thoughts in the comments below!