US CPI preview and what comes next for US stock indices

The collapse of three regional US banks triggered liquidity and financial stability concerns. If there were a good time for calm heads to prevail, it would be right about now.

This would be further aided by evidence of cooler US inflation data evening (11.30pm Sydney time), allowing the Federal Reserve to pause its rate hiking cycle and possibly ease monetary policy if required.

The worst scenario (outlined below) would be stickier-than-expected inflation which would call for higher interest rates when the exact opposite is needed to calm frayed nerves.

January's inflation numbers

Headline inflation fell to 6.4%YoY in January from 6.5%YoY in December, notably less than market expectations of 6.2%. Core CPI eased to 5.6% in January from 5.7% in December but above market forecasts for 5.5%.

What is expected this month?

• Headline inflation is expected to increase by 0.4% in February, taking the annual inflation rate to 6%YoY
• Core inflation is expected to rise by 0.4%, with the annual rate at 5.5%YoY.

What to watch for

• The rise in inflation in February is expected to be driven by gains in used car prices (+0.5%), reflecting rising used-car auction prices
• Strong demand for air travel and elevated jet fuel prices will increase airfares by 8%
• Providing some relief, shelter inflation is expected to continue to decelerate.

Equity markets: the good and the bad

The range of expectations for tonight’s headline number is from 5.8%YoY up to 6.3%YoY, with the median estimate at 6%YoY.

• If headline inflation were to come in a 6.2%YoY or higher, it would further shake risk sentiment
• If headline inflation were to print at 5.9%YoY or lower, it would support risk sentiment and more latitude for the Fed to pause its rate hiking cycle and potentially cut rates.

S&P 500 technical analysis

After two weeks of toying with the support from the 200-day moving, a definitive break lower was viewed at the end of last week.

Providing the S&P 500 remains below the short-term resistance at 3950 from the 200-day moving average and a cluster of horizontal resistance at 4025/35, it would indicate that the corrective rally from the October low is complete at the 4208 high, and the downtrend has resumed.

In this case, the next downside target is the 3788 low from December 22nd, followed by support from the October lows at 3600/3500.

S&P 500 daily chart

Nasdaq technical analysis

Overnight the Nasdaq has springboarded again back above the 200-day moving average at 11,947, which contrasts with the S&P 500 and Dow Jones and keeps open the possibility of higher levels for the Nasdaq. As such, providing the Nasdaq holds above 11,947 (closing basis) allows the rally from the October lows to take another leg higher in March towards the August 13,740 high.

Aware that a sustained close back below the 200-day MA at 11,947 would confirm that the rally from the October lows has been corrective and the downtrend has resumed.

Nasdaq daily chart

Dow Jones technical analysis

Late last week, the Dow Jones broke and closed below the range lows 32,570/32,350 area it had spent the past fourth months trading above.

Providing the Dow Jones remains below the resistance formerly, support at 32,550/600, the expectation is for the Dow Jones to trade lower towards support at 30,000.

Dow Jones daily chart