Will Wall Street's short-covering rally continue ahead of key inflation data?

US indices extend winning streak

The three major United States (US) indices ended higher on Friday, recovering from early weakness to achieve their fourth consecutive Friday of gains. Over the week, Wall Street increased by 497 points or 1.20%, the US 500 rose by 0.51%, and the US Tech 100 gained 0.25%.

With minimal economic data and Friday night's 'triple witching' - the quarterly expiration of stock options, stock index options, and stock index futures - proving uneventful, attention shifted to comments from Chicago Federal Reserve (Fed) President Goolsbee. He expressed confidence in the economy's resilience and stated that 'if there is progress on inflation, rates will be lower in 12 to 18 months.'

Key economic data and market flows

• US 500 flash purchasing managers' indices (PMIs)
• Conference Board (CB) consumer confidence
• Fed's preferred inflation measure, the core personal consumption expenditures (PCE) price index.

Towards the end of the week, month-end and quarter-end rebalancing flows in stocks and foreign exchange (forex) will be factors to watch. Typically, this process involves selling the winners and buying the losers, suggesting potential buying of the US 500 and the US Tech 100 at the expense of high-flying European and Chinese stock markets.

In the lead-up to the 2 April date for US President Trump's proposed 'reciprocal tariffs,' there is much speculation regarding their specifics, timeline, and duration of implementation. The expectation is that the process will be more organised and structured than previous actions. Whatever numbers are announced on 2 April are likely to be negotiated down from there.

Core PCE price index

Date: Friday, 28 March at 11.30pm AEDT

For January, headline personal consumption expenditures (PCE) prices in the US increased by 2.5% year-over-year (YoY) in January 2024, marking a slowdown from 2.6% in December.

The core PCE price index, the Fed's preferred measure for underlying inflation, rose by 0.3%, in line with market expectations. This allowed the annual rate of core PCE to ease to 2.6% from 2.9% in December, still well above the Fed's 2% target.

Fed officials have repeatedly expressed, including at last week's Federal Open Market Committee (FOMC) meeting, that they are in no rush to cut rates again as they evaluate the impact of President Donald Trump's trade and immigration policies and wait to see more progress on inflation before considering further rate cuts.

The softer-than-expected February consumer price index (CPI) and producer price index (PPI) reports earlier this month do not challenge the Fed's cautious stance on rate cuts, particularly since some softer components of the CPI release, such as airfares, are not part of the Fed's preferred inflation measure, the core PCE price index. Furthermore, some components within the CPI and PPI report that feed into the core PCE price index were hotter than the headline suggests.

Consequently, the market is looking for the headline PCE price index to rise to 2.7% YoY and for the core measure to rise to 2.8% YoY. Nonetheless, the US rates market starts the week pricing in 20 basis points (bp) of Fed rate cuts for June and a cumulative 67 bp of Fed rate cuts this year.

Headline PCE price index chart

US Tech 100 technical analysis

We view the bounce that started from the 19,152 low of mid-March as a short-covering rally/corrective bounce. It is viewed as a short-covering rally because we can't find any compelling reason for US equity markets to undertake a more sustainable rally back to year-to-date highs in the current climate. We do also hasten to add short covering rallies can last longer and extend further than expected.

Short-term resistance is located at 20,000 – 20,100, stemming from the broken uptrend line from the December 2022, 10,671 low, before stronger resistance is encountered at the 200-day moving average (MA), currently at 20,292. Above here, the 50% Fibonacci retracement of the decline from the 22,222 high to the 19,152 low is located at 20,694.

US Tech 100 daily chart

US 500 technical analysis

As noted in the US Tech 100 section above, we view the bounce from the mid-March 5504 low as a short-covering rally/corrective bounce simply because we can't find a compelling reason for US equity markets to rally back to year-to-date highs in the current climate.

A continued bounce from here will likely encounter short-term resistance initially at the 200-day MA at 5740 before horizontal resistance at 5770 – 5800. This is being reinforced by the 50% Fibonacci retracement of the decline from the record 6147 high to the mid-March 5504 low at 5830ish.

US 500 daily chart

• _{Source: TradingView. The figures stated are as of 24 March 2025. 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.}