The key to the success or failure of the U.S. stock counteroffensive depends on the U.S. April CPI tonight!

The world's eyes are on the US April CPI data released tonight, and the CPI has become the most critical data for US stocks against the backdrop of the current economic situation and the lingering specter of inflation.

At 20:30 Beijing time on Wednesday night, the U.S. Department of Labor will release April CPI data. The forecasts of major Wall Street investment banks for April CPI are less divided, with most believing that inflation will slow slightly. The current consensus projections are:

CPI will rise 0.4% month-on-month in April, unchanged from March; The year-on-year increase is expected to ease slightly to 3.4% from 3.5% in March.

Core CPI, which excludes food and energy, is expected to rise 0.3% month-on-month, down from 0.4% in March. The year-on-year increase is expected to ease to 3.6% from 3.8%.

However, even if inflation comes down somewhat, it may still not be satisfying for the Fed. Overnight, Fed Chair Jerome Powell said in a speech in Amsterdam that the Q1 data had cut his confidence that inflation was cooling, so the Fed could not give a question of whether or when it would be able to lower interest rates.

In fact, US inflation did not start the second quarter well. Earlier data showed that PPI rose 0.5% month-on-month in April, almost double expectations, and accelerated to 2.2% year-on-year, the highest level in a year.

This suggests that the Fed is likely to keep interest rates higher for longer. Financial markets' expectations for the number of rate cuts this year have fallen to two from six at the beginning of the year, with less than a 50% chance of a rate cut in September.

Dan North, senior economist at Allianz Trade North America, said the Fed is unlikely to consider cutting interest rates before September, even if CPI is in line with consensus expectations.

U.S. stocks pulled back after hitting new highs in mid-April, but market sentiment improved in May, and U.S. stocks resumed their upward trend. A significant reason for this volatility is the market's oscillating expectations for US inflation data and the Fed's policy outlook. Therefore, it is foreseeable that if inflation exceeds expectations again, it may once again weigh on risk sentiment and test the support of U.S. stocks; If inflation shows signs of cooling, it could boost market confidence and support a prolonged rally in U.S. stocks.

Housing inflation is sticky, and rents are still rising

The biggest highlight of April's CPI data will be housing costs, which dominate about a third of the CPI weight. In the cost of housing, the Owners' Equivalent Rent (OER) occupies the absolute "C position".

Over the past year, the Fed has been pinning its hopes on easing the pressure on the rental market and hoping to repeat the impressive downward trend in inflation seen in 2023.

However, the reality is that although OER has fallen from its peak of 8% in April last year, it still rose 5.9% year-on-year in March, well above the headline inflation target of 2%. This means that despite the overall slowdown in inflation, rents are still "rising", and the stickiness of housing costs is obvious.

Goldman Sachs expects rent growth to slow to 0.37% m/m in April, but OER growth will remain strong at 0.45%, citing higher rents for new tenants and a widening gap between new tenants and existing room rents in single-family homes.

In addition, Nomura and Barclays increased OER by 0.44% and 0.46% month-on-month, respectively, in April.

It is worth noting that compared with food and energy prices, rents tend to have a certain lag in their response to the economic environment and policy adjustments. This means that even if the economy slows, the inertia of rising rents is likely to persist for some time.

We haven't seen any significant changes in the real estate market. Demographic change is slow.

In addition, the so-called "super-core CPI" (non-rental core services) is also worth paying attention to. Barclays expects non-rental core services growth to slow to around 0.4% m/m in April.

Barclays expects core services CPI growth to slow to 0.44% from 0.52% m/m, mainly due to easing inflationary pressures in areas such as transport, healthcare and "other" services, which will also help the "super-core CPI" decline in the month.

U.S. stocks may usher in more violent volatility

Institutions generally believe that this week's CPI data will be the key to dominating the sentiment and trading direction of U.S. stocks in the coming period.

Morgan Stanley strategists led by Marina Zavolock said that in the 90s of the 20th century, U.S. stocks rose around the Fed's pivot, driven by bond-sensitive sectors such as real estate, construction and materials, and utilities.

The key catalyst for the success or failure of the deal was this week's US CPI.

Judging from the reaction of the derivatives market, investors generally expect that the CPI data will bring greater volatility.

The UBS derivatives strategy team led by Maxwell Grinacoff said they believe that implied volatility (VIX) and implied volatility (VVIX) have bottomed out in the short term, and the implied volatility of CPI data for U.S. equities will exceed 1%.

UBS recommends selling put options ahead of key CPI and retail sales data to fund call spreads in preparation for a modest rebound in volatility risk premiums.

In addition, there have been some changes in market pricing.

Bank of America Merrill Lynch's Ohsung Kwon derivatives strategy team pointed out that in the case of lower-than-expected CPI data, the rate-sensitive sector may have a "squeezed" rally, and its upside may outweigh the downside risk if the data is higher than expected. That's because inflation data has been above consensus expectations for the past five months, and interest rate markets have priced in five rate cuts this year.

But Bank of America Merrill Lynch believes that the stock market has the ability to absorb higher inflation. If the data is in line with expectations, this could at least in the short term eliminate inflation concerns and be positive for the market.

John Stoltzfus, chief strategist at Oppenheimer Asset Management, expects that the recent market volatility may continue to provide investors with the opportunity to "pick up bargains" during market declines, given investors' heightened focus on the April CPI report.

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