Preview: traders on edge as US inflation report looms

It was a quiet session overnight, with traders content to sit on their hands ahead of the release of the US inflation report on Wednesday night.

Following last week’s FOMC meeting, which noted its next decisions would be driven by “incoming data, meeting by meeting”, inflation prints for April and May (both set to drop before the June Fed meeting) have gained added importance.

More so against the backdrop of Friday’s non-farm payrolls, which despite downward revisions, saw the unemployment fall back to its cycle low of 3.4% and included an upside surprise in average hourly earnings as they rose to 4.4% YoY (vs 4.2% exp).

What is expected from the April CPI report?

The market is looking for Core CPI to rise by 0.3% in April, which would see the annual rate ease to 5.5% from 5.6% previously. The range of expectations is from 5.3% to 5.6%.

Headline inflation is expected to rise by 0.4% MoM, which would see the annual rate stay steady at 5%. The range of expectations is from 4.7% to 5.2%.

The annual headline inflation rate has not been below 5% in 17 months - since November 2021. Hence should we see an annual inflation print with a “four” handle, it would likely be welcomed by equity markets - more so if core CPI rises by less than the 5.5% expected.

However, if the core inflation remains firm, the market will not get the resolution it is looking for. Currently, the rates market has a 12% chance of a June hike priced in, followed by a 33% chance of a rate cut in July.

S&P 500 technical analysis

The S&P 500’s bounce from the support at 4070/60ish negates the short-term downside risks and reinforces its importance.

We use 4070/60 as the near-term bull/bear divide and note that while the S&P 500 remains above 4070/60, a retest of range highs 4200/10 is likely. Aware that should the S&P 500 see a sustained break above 4210 (three daily closes above), it would put the August 4327 high on the market’s radar.

To re-energise the downside, the S&P 500 needs to remain below 4210 and then see a sustained break below 4070/60 which would then bring into play 4000 and then 3800.

S&P 500 daily chart

Nasdaq technical analysis

Like the S&P 500, the Nasdaq has found itself in a holding pattern between downside support at 12,800 and recent highs 13,350/70 area. A sustained break above resistance at 13,350/70 would likely set up a retest of the August 13,740 high.

Aware that if the Nasdaq were to make a hasty retreat away from range highs and then see a sustained break below 12,800, it would signal that a deeper pullback is underway towards 12,400 with scope to the 200-day moving average at 12,100.

Nasdaq daily chart

Dow Jones technical analysis

Over the past week, the price action in the Dow Jones has been indecisive despite posting a monthly close above the downtrend resistance from the bull market 36,952 high.

If the Dow Jones can now take out last week’s 34,257 high and the 34,342 high year-to-date high, it opens a test of the 34,712 high from December 2022 with a scope to the 35,492 high from April 2022.

Aware that a retreat much last week’s 32,937 low and below the 200-day moving average at 32,724 would suggest the Dow Jones’s latest attempt to break higher has failed and that a deeper decline towards support at 32,000 is underway.

Dow Jones daily chart

1. TradingView: the figures stated are as of May 9, 2023. 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.