【MACRO Alert】Wall Street on Edge as CPI Index Looms - Expectations of Easing Inflation Remain High, Market Volatility Imminent

This week, Wall Street opened cautiously as traders focused on the imminent release of crucial CPI inflation data, leading to slight fluctuations in the US stock market, bond market, and the dollar ahead of the CPI data release.

Market expectations generally suggest that the CPI index may indicate a moderation in inflation, but at levels still skewed towards the higher end, which may not bode well for expectations of interest rate cuts. A recent survey by the New York Fed indicates an increase in public expectations for future inflation. Some seasoned traders are advising investors to prepare for possible market volatility, suggesting that the current calm in the US stock market may be disrupted.

Analyst Andrew Tyler of J.P. Morgan anticipates that based on options market speculation, the S&P 500 index may experience at least a 1% fluctuation following the release of CPI data on Wednesday. Tyler adds, “The main risk comes from the possibility of CPI data exceeding expected levels of heat. Imminent macroeconomic data releases may bring dual risks: on one hand, stronger-than-expected economic growth may exacerbate inflation, while on the other hand, economic sluggishness may increase the risk of recession or 'stagflation'.”

Goldman Sachs' Scott Rubin noted that with traders increasing their long positions, market liquidity has improved, and despite market pressures, funds continue to flow in. Meanwhile, Chris Larkin of Morgan Stanley E*Trade mentioned that the subsequent performance of the S&P 500 index after its continuous rebound will be influenced by the impending inflation data release, with investor expectations for interest rate cuts possibly being a key factor.

Ohsung Kwon of Bank of America emphasized that if inflation data comes in below expectations, interest rate-sensitive lagging companies may face squeezing risks; conversely, they may face relatively smaller downside risks. If the data aligns with expectations, it may temporarily alleviate inflation threats.

Barry Bannister of Stifel Nicolaus & Co. predicted that if inflation persists, the S&P 500 index could decline by about 10% in the coming months. Additionally, strategists at HSBC believe that if the CPI inflation report matches expectations, it would be supportive of further upside in risk assets.

Matt Maley of Miller Tabak + Co. warned that after experiencing a strong rebound following significant declines, the US stock market may form a “double top” in technical analysis, which is a bearish signal.

This week, market analysts are closely monitoring the US stock market and inflation data, along with its potential impact on the bond market. Matt Maley pointed out that a reversal in inflation data could be unfavorable, but further market rebounds indicated by the data might propel major indices above their highs for 2024, which would be a positive signal.

Jason Pride and Michael Reynolds of Glenmede believe that if the inflation retreat is only temporary, it would be reasonable to begin easing in the fall; however, if inflation persists, the timeline may need adjustment. Marco Colaninno of J.P. Morgan stated that in the current macroeconomic environment, the returns from buying stocks are not sufficient to offset their risks.

Ben Snider of Goldman Sachs mentioned that despite the S&P 500 index exceeding year-end targets, he remains optimistic about the stock market due to strong corporate earnings in the US. Additionally, crucial CPI, producer price, and retail sales data are set to be released this week, which will be important factors in assessing market trends. Federal Reserve Chairman Powell will also deliver a speech, potentially influencing market sentiment.

Furthermore, data from Bank of America shows that holding US stocks for the long term could yield significant returns, particularly as missing the best trading days could substantially reduce the rate of return. Therefore, investors should exercise caution when considering reducing their stock holdings and should look to historical perspectives for reasons to continue investing.