Just look at the CPI on Wednesday, the global market changes

Source: Wall Street

The upcoming US April CPI data on Wednesday is the focus of the market this week. According to the analysis, the CPI data on Wednesday is crucial to shaping the Federal Reserve's policy and the prospects of the global financial market, and the global market may usher in changes.

CPI is expected to moderate in April

　　 At present, the market generally expects that the CPI will ease in April, and some famous trading departments warn investors that they should be prepared for the possible calm of the stock market. Some analysts believe that whether the market can continue to rebound may depend on whether investors take a positive attitude towards cutting interest rates after the CPI data is released.

　　 JPMorgan analysts said that after the CPI data was released on Wednesday, the S&P 500 index would fluctuate by 1% in any direction. Analysts said: "The key risk is that the CPI data is overheated. But the upcoming macro data creates a two-way risk - on the one hand, unexpected strong growth drives inflation concerns, and on the other hand, weak growth causes recession or 'stagflation' concerns."

Some analysts believe that the stock market may be able to withstand higher inflation, considering that further interest rate increases have been excluded. Data in line with expectations should also be positive for the market, at least in the short term to remove the barriers to inflation.

Previously, Morgan Stanley and Standard Chartered analysts believed that the CPI data on Wednesday would be lower than expected.

Seth Carpenter, chief economist of Morgan Stanley, pointed out that housing inflation accounts for 40% of the core CPI and 18% of the core PCE. Therefore, no matter how housing inflation goes, the entire CPI data may follow.

The bank believes that the current rent data is very weak. Despite the surge in immigration last year, the vacancy rate of multi family apartments is approaching a historical high, housing inflation has released a downward signal, and the US CPI will be "significantly lower than expected" on Wednesday. In addition, due to the previous seasonal adjustment factors, the inflation data in the first quarter was higher than the actual situation, which will be corrected later.

Analysts of Standard Chartered Bank have also said that housing inflation may decline soon and drive core inflation downward.

Return of "soft landing transaction"

　　 Many investors believe that if inflation slows, the rising space of US bonds will be greater than that of US stocks. Although the stock market is close to the historical record, the yield of 10-year US bonds is still far higher than the level below 4% at the beginning of the year.

In recent months, investors have been plagued by persistent inflation. At the beginning of 2024, traders had made up to six bets on interest rate reduction, but then they had to quickly reduce these bets because CPI continued to exceed expectations. This shook the stock market in April and pushed bond yields to the highest level since November.

Many investors said that the employment report in April eased some of their concerns, because the colder labor market should eventually lead to more moderate price growth. Now, only the actual inflation data are needed to support this.

Gennadiy Goldberg, head of US interest rate strategy at TD Securities, said: "The CPI report may greatly promote the statement that interest rate cuts are coming."

Analysis shows that there is a close relationship between stocks and bonds. Treasury bond yields are largely affected by investors' expectations of short-term interest rates set by the Federal Reserve. In turn, the stock price is partly affected by investors' measurement of the risk-free returns that can be obtained from holding US bonds at maturity.

The Dow has risen 4.3% this month, only 1% below the record high set at the end of March. The rise in bond prices reduced the yield of 10-year US Treasury bonds to 4.479% from 4.7% at the end of April.

Bond returns have been disappointing in the past few years as interest rates have risen more than investors expected and for longer than expected. Nevertheless, whenever there are signs of easing inflation, investors will quickly buy bonds, eager to lock in the yield of 4% - 5% before the Federal Reserve begins to cut interest rates.

Ed Perks, chief investment officer of Franklin Income Investors, said that if the data showed that inflation was slowing down, he expected that the yield of short-term U.S. bonds might decline by 0.2 to 0.25 percentage points, and that of long-term U.S. bonds might decline by 0.1 to 0.2 percentage points.

At the same time, he said: "Given the current stock valuation, it is more difficult for stocks to rise significantly." Therefore, he added that if inflation is higher than expected again, stocks may have more room for decline.

George Mateyo, chief investment officer of Key Private Bank, said that, in view of the fact that a bad report may harm both the US stock market and the bond market, it is still wise to have unconventional assets such as real estate, inflation protected bonds or international stocks to hedge against the re emergence of high inflation readings.

"We think inflation will be a bit stubborn," he said

European stock market will also usher in changes

Morgan Stanley recently released a research report that the "Santa Claus" market led by bond yield sensitive stocks in the European stock market since the end of 2023 has recently returned, and this week's US CPI data will be the key catalyst for the success of this transaction.

The research paper believes that several historical preconditions for the performance recovery of bond yield sensitive stocks have been met: first, the stock bond yield inverse correlation has soared to a historical high, plus the bottom/recovery of the breadth of earnings correction, the improvement of macro indicators, oversold in technical aspects, and the major repricing of the Federal Reserve's interest rate cut expectations. In addition, some of the most sensitive parts of the market, such as the credit spread of real estate, have narrowed significantly, which is a good leading indicator of stock performance.

　　 However, the most important prerequisite for the continuous rebound of this category of stocks is still the slowdown of the US inflation data. According to the research report, we have seen preliminary signs. The recent non-agricultural employment data is lower than expected and the increase of unemployment benefit applications last week all contribute to the initial recovery of European bond yield sensitive stocks.

Nevertheless, the US CPI data on Wednesday will be a key catalyst. Morgan Stanley expects that the month on month growth of core CPI in April will slow to 0.29% (0.36% last time, 0.3% expected), and data that meets or falls short of expectations will drive the continuous rebound of European bond yield sensitive stocks.

Risk tips and disclaimers

There are risks in the market, so investment should be cautious. This article does not constitute personal investment suggestions, nor does it take into account the special investment objectives, financial conditions or needs of individual users. Users should consider whether any opinions, opinions or conclusions in this document are consistent with their specific situation. Invest accordingly and be responsible for it.

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