The Stock Market Wavesr as Traders Map Out a CPI Game Plan

At the onset of a new week, stock markets experienced fluctuations, with all eyes set on forthcoming inflation data, deemed crucial in shaping the Federal Reserve's policy outlook.

‍

The recent uptick in the S&P 500 index brought it close to wiping out its April decline amid growing speculation that inflationary pressures might be abating. While projections for the annual increase in the core consumer price index, scheduled for release on Wednesday, indicate the smallest rise in three years, it is anticipated to still surpass levels desired by policymakers. The Fed seeks consistent evidence of inflation slowing to justify potential rate adjustments.

‍

JPMorgan Chase & Co.'s trading desk anticipates significant swings in the S&P 500 following the CPI report, according to Andrew Tyler. Daily breakevens in the options market reflect traders' expectations of a 1% movement in either direction for the stock index post-data.

‍

"The key risk is a hotter CPI print," Tyler highlighted, emphasizing the dual risk associated with upcoming macroeconomic data: stronger-than-expected growth fueling inflation concerns or weaker growth leading to worries of recession or stagflation.

‍

Trading around 5,220, the S&P 500 remained in close proximity to its recent levels. Meanwhile, unprofitable and heavily shorted stocks surged, with GameStop Corp. witnessing a notable increase after a cryptic post on X from Keith Gill, famously known as "Roaring Kitty," a prominent figure from the 2021 meme-stock frenzy. US 10-year yields registered a marginal decline of one basis point to 4.48%.

‍

The US Core Consumer Price Index is anticipated to exhibit a slight cooling trend, signaling a step in the right direction. However, further progress is deemed necessary by the Fed.

‍

"This week’s all-important inflation data arrive just as a three-week rally has the S&P 500 knocking on the door of its March record highs," noted Chris Larkin at E*Trade from Morgan Stanley, underlining the potential impact of this week's numbers on market sentiment.

‍

Prior to the CPI release, economists will analyze producer price data on Tuesday, assessing the influence of various sectors like healthcare and portfolio management on the Fed's preferred inflation gauge, the personal consumption expenditures price index. Fed Chair Jerome Powell is also scheduled to address the public on the same day.

‍

Stifel Nicolaus & Co.'s Barry Bannister believes that a stagnation in progress on inflation might trigger a decline in US equities in the forthcoming months, projecting a potential drop of around 10% in the S&P 500 to approximately 4,750.

‍

HSBC strategists led by Duncan Toms suggest that an inflation report meeting expectations could fuel further gains in risk assets.

‍

Robert Teeter at Silvercrest Asset Management advises investors to brace for potential market fluctuations pending the CPI release or subsequent inflation data until the Fed provides clarity on rate cuts.

‍

Matt Maley at Miller Tabak + Co. identifies the current stock market setup as critical, indicating vulnerability to a "double-top" scenario following April's decline and subsequent rebound. A substantial reversal triggered by this week's inflation data could have negative implications, while further rally above 2024 highs could signal bullish sentiment.

‍

Meanwhile, hedge funds have increased selling of financial stocks amidst signs of economic weakness and nearing key technical levels.

‍

In light of these developments, investors contemplating adjustments to their stock exposure should consider the historical significance of staying committed to US equity allocations. Bank of America Corp.'s data suggests that missing the best days in the market could significantly impact returns, emphasizing the importance of time in the market over timing the market.

‍

Additionally, guidance from retail giants Walmart Inc. and Home Depot Inc. will provide insight into consumer sentiment alongside April readings for industrial production and retail sales, amidst rising joblessness concerns. Lisa Shalett at Morgan Stanley Wealth Management points out the potential impact of yield curve dynamics on consumer confidence, highlighting the uncertainties surrounding the timing and impact of potential rate cuts.

‍