The upcoming US CPI data for April on Wednesday is the focus of the market this week. According to the analysis, Wednesday's CPI data is extremely critical to shaping the Fed's policy and the outlook of the global financial market, and the global market may usher in a change point.
CPI is expected to moderate in April
The market is now widely expecting some moderation in April's CPI, with some prominent trading desks warning investors that they should be prepared for a possible break of the calm in equities. Some analysts believe that whether the market can continue to rebound may depend on whether investors are positive about interest rate cuts after the release of CPI data.
JPMorgan analysts said the S&P 500 will move 1% upwards in either direction after the CPI data is released on Wednesday. "The key risk is that the CPI data is overheated," the analysts said. But the upcoming macro data creates two-way risks – on the one hand, unexpectedly strong growth driving inflation fears, and weaker growth triggering recession or 'stagflation' fears on the other. ”
There are also analysts who believe that the stock market may be able to withstand higher inflation, given that further interest rate hikes have been ruled out. The expected data should also be positive for the market, removing the barrier to inflation, at least in the short term.
Previously, Morgan Stanley and Standard Chartered analysts believed that Wednesday's CPI data would be lower than expected.
Morgan Stanley Chief Economist Seth Carpenter pointed out that housing inflation accounts for 40% of core CPI and 18% of core PCE, so whatever housing inflation goes, the entire CPI data is likely to follow.
The bank believes that the current rental data is very weak, and despite the surge in immigration last year, the vacancy rate for multi-family apartments is approaching record highs, and housing inflation has sent signals of a downside, with US CPI "significantly lower than expected" on Wednesday. In addition, the inflation data for the first quarter was higher than the actual situation due to previous seasonal adjustments, which will be corrected at a later stage.
Analysts at Standard Chartered Bank have also previously said that housing inflation may soon fall and pull core inflation downward.
The "soft landing deal" returns
Many investors believe that if inflation slows, Treasuries will have more upside than U.S. stocks. Although the stock market is close to its all-time record, the yield on the 10-year Treasury note is still well above the level below 4% at the beginning of the year.
Persistent inflation issues have plagued investors in recent months. Traders had bet on up to six rate cuts in early 2024, but then had to quickly scale back those bets as CPI continued to beat expectations. That shook the stock market in April and sent bond yields to their highest levels since November.
Many investors said April's jobs report eased some of their concerns, as a colder labor market should eventually lead to more modest price growth. Now, only actual inflation data is needed to back this up.
TD Securities美国利率策略主管Gennadiy Goldberg表示：“CPI报告可能会大大推进降息即将到来的说法。 ”
According to the analysis, there is a strong connection between stocks and bonds. Treasury yields are largely influenced by investors' expectations for short-term interest rates set by the Federal Reserve. Stock prices, in turn, are influenced in part by investors gauging the risk-free return to maturity of holding U.S. Treasuries.
The Dow has risen 4.3% this month, just 1% below its record high set at the end of March. The rise in bond prices has brought the yield on the 10-year Treasury note down to 4.479% from 4.7% at the end of April.
Bond returns have disappointed over the past few years as interest rates have risen more than investors expected and have lasted longer than expected. Still, whenever there are signs of easing inflation, investors are quick to buy bonds, rushing to lock in 4%-5% yields before the Fed starts cutting rates.
Ed Perks, chief investment officer at Franklin Income Investors, said he expects yields on short-term Treasuries to fall by 0.2 to 0.25 percentage points and long-term Treasuries by 0.1 to 0.2 percentage points if data show that inflation is slowing.
At the same time, he said: "Given the current valuation of equities, it is more difficult for equities to rise significantly. As a result, he added, stocks could have more room to fall if inflation is higher than expected again.
George Mateyo, chief investment officer at Key Private Bank, said it was still wise to have unconventional assets – such as real estate, inflation-protected bonds or international equities – to hedge against another high inflation reading, given that poor reports could hurt both the U.S. stock and bond markets.
"We think inflation is going to be a bit stubborn," he said. ”
The European stock market will also usher in a change in stock
Morgan Stanley recently released a research report saying that the "Santa Claus" market dominated by bond yield-sensitive stocks that began at the end of 2023 has recently returned, and this week's US CPI data will be a key catalyst to determine the success or failure of this transaction.
According to the report, several historical preconditions for a recovery in bond yield-sensitive equity performance have been met: first, a spike in the inverse correlation between equity and bond yields to record highs, coupled with a bottom/recovery in the breadth of earnings corrections, improved macro indicators, oversold technicals, and a significant repricing of Fed rate cut expectations. In addition, credit spreads in some of the most yield-sensitive parts of the market, such as real estate, have narrowed significantly, which is a good leading indicator of equity performance.
However, the most important prerequisite for a sustained rally in this category remains a slowdown in US inflation data. Initial signs are now being seen, with recent lower-than-expected non-farm payrolls data and an increase in jobless claims last week contributing to an initial recovery in European bond yield-sensitive stocks, the research report said.
Still, Wednesday's US CPI data will be a key catalyst. Morgan Stanley expects core CPI growth to slow to 0.29% m/m in April (0.36% last time vs. 0.3% expected), with data in line with or below expectations driving a sustained rally in yield-sensitive stocks in European stocks.
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