The widely expected U.S. Consumer Price Index was released last week and
has shown a significant slowdown since it peaked at 9% in June 2022. The
headline annual figure came in at 5.0%, down from 6.0% in February and
below expectations of 5.2%. While the annual core inflation, which excludes
the volatile food and energy items, ticked higher to 5.6%, as expected.
Headline inflation in the U.S. eased last month to its lowest level in
nearly two years, but the uptick in core prices could keep pressure on the
Federal Reserve to go ahead with another 25-basis point interest rate
increase at their upcoming meeting on the 3rd of May.
Inflation rates have been decelerating and the Fed’s aggressive interest
rate hikes could soon pause. According to some economists, inflation around
5% is no longer considered an emergency issue, which means the Federal
Reserve could feel less pressed to keep on with its aggressive interest
rate hikes.
The Federal Reserve minutes were also released last week. The main takeaway
from the minutes was that the central bank anticipates a mild recession in
late 2023. Since November 2022, economists at the Federal Reserve have
predicted subdued growth and after the banking crisis in March, that
forecast was revised to a recession.
The latest inflation data is one of the most important economic releases
ahead of the Fed’s next policy meeting. While there is some progress in the
fight against high prices, inflation remains still high, and the labour
market is still strong.
Fed officials do not yet appear to have reached a consensus over whether
another 25-basis point rate rise will be needed before the central bank
pauses. Last month most officials supported an additional increase, which
would push the federal funds rate above 5% and forecast no cuts until 2024.
That is in sharp contrast with the current futures market pricing, which
suggests the Fed will deliver one last rate hike in May before reversing
course and cutting the federal funds rate towards the end of the year.
Earnings season in the U.S. picks up steam with the major benchmark indices
trading sideways as investors assess a slew of earnings reports and their
implications for the economy.
Source: Tradingview
So far earnings season has proven resilient so far against expectations for
declining profits. While results are likely to be largely in-line with
expectations, the focus will be on forward guidance and tighter credit
conditions.
FactSet data forecasts that Q1 earnings of the S&P 500 will decline by
6.5%, year-on-year, which would mark the second quarterly earnings decline
in a row and the largest since the second quarter of 2020.
The rally from the March lows is losing momentum over the past few days
weighed down by mixed quarterly results. Investors are searching for
direction amid choppy economic data, high interest rates, expectations of
upcoming recession and volatility in the market.
While at this juncture in time there is no sign the rally from the March
low is reversing direction, the index is approaching its previous
resistance of 4,200 and overbought momentum levels, which means it might be
challenging to edge higher from here in the short-term.
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