Wall Street: Will this week's key US CPI release be the catalyst for new all-time highs?

Dow, S&P 500, and Nasdaq extend winning streaks

Last week, the S&P 500 and the Nasdaq continued their upward trajectory, locking in a third consecutive week of gains, outshone by the high-flying Dow Jones which notched up its fourth straight week of gains.

All three were supported by a robust earnings season and optimism around Fed rate cuts. For the week, the Dow Jones added 837 points (2.16%), the S&P 500 gained 1.85%, and the Nasdaq added 1.51%.

On Friday night, the University of Michigan’s Consumer Sentiment index fell to 67.4 in May from 77.2 in April, reaching its lowest level in six months. This decline was accompanied by a concerning rise in inflation expectations for one year ahead to 3.5%, the highest level in six months.

Fed remains steadfast on inflation target

Consumer spending is a key driver of the US economy, accounting for two-thirds of its GDP on average. With signs of the labour market cooling and households’ excess savings accumulated during the pandemic officially depleted, the argument for rate cuts is becoming more compelling.

However, the Fed has made clear it is not in a position to cut rates until inflation makes further progress towards the Fed's inflation target. This stance has seen the rates market go from pricing in seven 25 basis point rate cuts four months ago to pricing in just 40 basis points of rate cuts for 2024.

What is expected from CPI

Date: 15 May at 10:30pm AEST

March saw a third consecutive month of stronger-than-expected inflation readings. Headline inflation rose to 3.5% YoY, up from 3.2% previously, while core inflation remained at 3.8% YoY, above forecasts of 3.7%.

This month, the market expects headline inflation to ease to 3.4% YoY, while core inflation is expected to fall to 3.6%. Behind the softer numbers, an expected decline in rent inflation and a reversal of recent upside surprises in service inflation are anticipated.

An inline number would likely see the equity market extend its rally. However, if core inflation were to print at 3.8% or higher, it would spark equity market volatility as the market pushes back a first-rate cut from September into year-end.

US core CPI chart

S&P 500 technical analysis

Our view that the rally from the 19 April low of 4953 is the second wave (Wave B) of a three-wave (ABC) corrective sequence unfolding from the March high of 5264 has not changed. Once the current B wave rally is complete, we expect another leg lower (Wave C) towards the 4850/4750 area, where we will look closely for signs of basing to establish long positions.

A loss of support at around 5120 would signal that Wave B has peaked and that Wave C is underway.

Be aware that should the S&P 500 cash first trade above 5264 it would indicate the correction likely finished at the 19 April low and the uptrend has resumed.

S&P 500 daily chart

Nasdaq technical analysis

There is no change to our view that the rally from the April low of 16,973 is the second wave (Wave B) of a three-wave (ABC) corrective sequence, unfolding from the 18,464 March high. Once the current Wave B rally is complete, we anticipate another leg lower (Wave C) towards the 16,500/16,300 area. Here, we will look for signs of basing to establish long positions.

A loss of support at 17,800/17,750 would signal that Wave B has peaked and that Wave C is beginning its descent.

However, we should be aware that if the Nasdaq first surpasses the 18,464 high, it will indicate that the correction is over and the uptrend has resumed.

Nasdaq daily chart

• ^{Source: TradingView. The figures stated are as of 13 May 2024. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.}