Despite a rally on Wall Street in the last session, the upcoming US consumer price index (CPI) data may not give a hand to market bulls, as the upcoming data might not be as optimistic as projected.
The US inflation trajectory is still facing uncertainties amid recent strong labour markets, and a pickup in energy prices recently, which may put stocks' rally on pause should the CPI data come in higher-than-estimated. And signs in the markets indicate that the rebound in equities could face a bump on the road ahead.
Spikes in the US bond yields
The US benchmark bond yields spiked after the US January job data as markets are now pricing in a slower exit of the Fed’s rate hike cycle after May at the earliest. The previous project was a rate hike pause after March and held throughout the year. The tight employment data helped improve the US economic outlook and pushed the bond yields and the US dollar. The US 10-year bond yield jumped from 3.4% to 3.7% in the last two weeks, and the US 2-year bond yield rose from 4.2% to 4.5% during the same timeframe. Today’s CPI could enhance this trend if the data provide an upside surprise. The consensus calls for a 6.2% increase in January year on year, a further down from 6.5% in December.
Oil prices and energy stocks rebuild strength
Crude prices rebounded since the Fed’s policy meeting on 2 February, when the Reserve bank raised interest rates by 25 basis points and hinted that a rate-hike pause could be after March. However, the strong US non-farm payrolls data was a slap in its face and made the Fed officials turn around to ”higher for longer” rates guidance.
The inflation positively correlated commodities, and oil markets regained strength by climbing 9% in two weeks. The rebound in the oil markets suggests that the inflation trajectory maybe not be as ideal as said.
Following crude oil’s comeback, the energy sector gained momentum again in the S&P 500 in the past week, with the Energy Select Sector SPDR ETF (XLE) up 4.6%. In contrast, the typical growth sector, Telecommunication Services (XLC) down 3% in the last five days, suggesting the sector rotation has changed course amid the Fed’s tweaks.
A potential pullback in Nasdaq
The above narrative may support a pullback in the tech-heavy index, Nasdaq due to re-rampant US bond yields and weakened sentiment in growth stocks.
The index faced near-term resistance of 12,800, the high on 2 February, potentially further pulling back towards the 200-day moving average support of 11,900. Both MACD and RSI are in overbought territory, suggesting an upside momentum exhaustion.
Disclaimer: CMC Markets Singapore may provide or make available research analysis or reports prepared or issued by entities within the CMC Markets group of companies, located and regulated under the laws in a foreign jurisdictions, in accordance with regulation 32C of the Financial Advisers Regulations. Where such information is issued or promulgated to a person who is not an accredited investor, expert investor or institutional investor, CMC Markets Singapore accepts legal responsibility for the contents of the analysis or report, to the extent required by law. Recipients of such information who are resident in Singapore may contact CMC Markets Singapore on 1800 559 6000 for any matters arising from or in connection with the information.
