Wall Street Wrap: Countdown to US CPI, VIX at two-week high

Market Recap

Risk sentiments remain on tenterhooks overnight ahead of the upcoming US consumer price index (CPI) release, with the data having a key influence over the path of Federal Reserve (Fed)’s monetary policies over the coming meetings. Progress in inflation has somewhat stalled in the January’s read, but follow-up comments from policymakers seem to suggest that they are willing to look beyond it as a one-off.

In Fed Chair Jerome Powell’s testimony to Congress last week, he continues to acknowledge “notable” progress in inflation and dampened hawkish expectations by saying that the Fed is “not far” from gaining enough confidence in the inflation fight to enable the start of an easing cycle. Another surprise run of hotter-than-expected inflation data for February will likely challenge that and may be a catalyst to drive further profit-taking in Wall Street, following its relentless rally year-to-date.

For now, expectations are for headline inflation to remain steady at 3.1%, while the core aspect is expected to ease to 3.7% from previous 3.9%. If it holds true, this will be the lowest year-on-year core reading since April 2021.

Sector performance: Magnificent Seven saw a lean into its laggards

Wall Street were mixed to end the day, with semiconductors adding to last Friday’s losses, notably in Nvidia (-2.0%), AMD (-4.3%) and Micron (-3.2%). Performance in the ‘Magnificent Seven’ stocks also saw a lean into the laggards, with Apple up 1.2% and Alphabet up 1.9%. On the other hand, Meta was down 4.4% while Amazon dipped 1.9% into the red.

Rate-sensitive growth sectors were the main drag, as Treasury yields witnessed an uptick overnight but further market moves will undoubtedly be determined by the upcoming US inflation data. The material sector (+1.1%) outperformed with another upmove to record high, while the energy sector (+1.0%) was resilient as well, seemingly finding some comfort from stable oil prices.

What to watch: VIX retesting upper end of consolidation base

Having formed a consolidation base since December last year, the VIX has now edged back to retest the upper end of its consolidation range at the 15.92 level overnight, reflecting increased hedging activities ahead of the key US inflation data. Any subsequent break above the range could potentially leave eyes on its year-to-date high at the 16.94 level next, while signalling heightened volatility for the US equities market. On the other hand, failure for a decisive breakout could leave the index stuck in its current consolidation phase, which could see the index trail back towards the lower base at 13.91 over the medium term.