US and European futures are trading lower as traders take extreme caution ahead of the most important economic reading of the week—the US CPI data. The data has the ability to bring vast amounts of volatility in the markets today as the number is closely watched by the Fed. So far, inflation readings have been printing encouraging prints even though the last month’s reading is still running well above the Fed’s target level. Market players have positioned themselves for slighter bad news today but anything which comes beyond the market expectation could be detrimental to the US stock market rally that we have seen so far this year.
U.S. equities have soared so far this year on the back of the Federal Reserve’s less hawkish stance, but the market has recently lost some of its momentum and investors have begun to fret about where the Fed may take its policies in the future. This is owing to the fact that earnings reported by US firms have been lacklustre, even though employment figures for the US painted a completely different story. As a consequence of the economic statistics, traders are now unclear about what to do, and the question on their minds is whether or not the stock market will continue to rise.
Last week’s Chairman’s speech changed market expectations for the Fed’s terminal rate. Market players and investors have expected the Federal Reserve to increase the rate by 25 basis points in their next meeting and many future sessions. The Fed also mentioned this. This suggests the central bank’s future interest rate may reach 5.25% to 5.5%.
The most crucial thing for traders to remember is that the inflation reading has the most influence. Today at 1:30 PM GMT, the consumer price index for the United States will be released. The current US CPI m/m prediction is 0.5%, while the CPI y/y projection is 6.2%.
If today’s numbers show more improvement, the Fed may have little motivation to retain its ultra-hawkish attitude. Remember maintaining an ultra-hawkish stance could backfire.
However, if the inflation number shows a little improvement or if it makes a U-turn and inflation starts to skyrocket again, it is very feasible that the Federal Reserve will take advantage of the opportunity to raise interest rates several times in the following quarters to tighten its grip on inflation.
US Stock Market
The Dow Jones Industrial Average finished yesterday with a gain of 376.66 points, which is equivalent to 1.11%, to conclude the session at 34,245.93. This was the index’s best day in February. With this increase, the S&P 500 ended the day at 4,137.29, up 1.14 percentage points, while the Nasdaq Composite rose 1.48 percentage points to 11,891.79.
Each of the three main indices just had a down week. The Dow lost 0.17 points last week. The S&P 500 lost 1.11%, while the tech-heavy Nasdaq dropped 2.41 %; both of these declines represent their worst weekly losses since December.
Following comments by Federal Reserve Chairman Jerome Powell that more work needs to be done to reduce inflation, market players have been on the edge. Jerome Powell said that if inflation remains high, interest rates may increase faster than expected.
Coca-Cola, Marriott, Cisco, Marathon, and Paramount all report this week as earnings season enters its last stretch. This earnings season has been the worst in over two decades, barring recessions, as corporations have announced worse-than-expected profits.
Défense stock On the Move
The recent shooting down of unidentified objects by the United States military may be good news for defense companies, which did well in 2022 partly due to the situation in Ukraine. Exchange Traded Fund (ETF) of U.S. Aerospace & Defense Companies (iShares U.S. (ITA) reached a new high for the period going back to February 2020 on Monday.
The precious metal will likely experience higher volatility today as the US CPI print could bring mammoth moves in the dollar index. Since breaking below the 1,900 mark, the price has been struggling to re-test its resistance of 1,900 and it seems that the path of the least resistance is more skewed to the downside in the short term.
If today’s number shows that inflation has eased off further, we could see the wind coming out of the dollar index, which should support the precious metal’s price. However, if the data fails to impress the market players, we could see the current sell off picking up more strength.