US equity futures started off a data-heavy week on the backfoot before a key report on US inflation that will test the resolve of a bull market riding on bets that Federal Reserve Chair Jerome Powell and his colleagues are moving closer to a pivot to easier policy.
Futures on the S&P 500 slipped 0.2% while those on the rate-sensitive and tech-heavy Nasdaq 100 were steady. The 10-year Treasury yield was flat.
Tuesday’s US Consumer Price Index report is a key piece of the puzzle toward completing the backdrop for the Fed to start cutting rates in the middle of the year. Comments from policy makers last week appeared very dovish, and swaps traders see a June rate cut as a virtual lock, even with another set of strong payroll data on Friday.
A stronger-than-anticipated jump in consumer prices could derail rallies in stocks and bonds fueled by confidence that the Fed is on the verge of pulling inflation back to its target. That was the case last month, when the CPI data triggered a market selloff. The impact may be stronger this time because it’s the last major piece of economic data before the Fed’s March 20 meeting.
“The bottom line is that loads of folk are preoccupied trying to predict or front-run a first Fed rate cut,” said Mark Dowding, the CIO at RBC BlueBay Asset Management. “I still see this as some months away.”
In currencies, the Japanese yen extended its meteoric rise on expectations the Bank of Japan is about to start lifting interest rates. Bitcoin topped $71,000 for the first time, advancing for a sixth straight day and taking this year’s rally to almost 70% on the back of massive inflows into US exchange-traded funds. Meanwhile, a gauge of the dollar is on track for a seventh day of losses, its longest losing streak in almost four years.
Further moderation in US prices would support the disinflation narrative that broadly remains intact, despite a pullback in the number of Fed rate cuts expected this year. Core prices in the consumer price index are expected to tick 0.3% higher in February from a month earlier, and 3.7% on a year-over-year basis — which would be the smallest annual rise since April 2021.
Recent comments from policy makers have supported the case for easing. The S&P 500 rallied 1% Thursday when Powell said in his testimony before the Senate that the central bank is “not far” from being ready to cut interest rates. The same day, Powell’s European counterpart Christine Lagarde said the European Central Bank could start reducing rates as soon as June, sending the Stoxx Europe 600 Index up 1.3%.
America’s improving economy and a slowing rate of inflation are making the case for bears a little harder. Exuberant positioning, stretched technicals and shaky earnings forecasts are among the few arguments left.
“A lack of a second-half growth inflection could serve as a headwind for economically sensitive areas of the market, particularly if the Fed holds off on cutting rates longer than expected,” according to Morgan Stanley’s chief US equity strategist Michael Wilson, one of the most prominent bearish voices on Wall Street. His 2024 target for the S&P 500 is 4,500, implying a roughly 12% drop from Friday’s close.
Elsewhere, Europe’s benchmark stock gauge dropped 0.4%, with basic resources leading declines after iron ore slumped on slackening demand from China.
In commodities, oil held a loss ahead of reports from OPEC and the IEA this week that may provide clues on the demand outlook. Gold hovered near a record on the Fed outlook.
Key Events This Week:
Some of the main moves in markets:
Stocks
Currencies
Cryptocurrencies
Bonds
Commodities
This story was produced with the assistance of Bloomberg Automation.
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