US equity indices ignite - Part II

US equity indices are on fire again overnight, confident that tonight's inflation report and Thursday's FOMC meeting will contain no unpleasant surprises. For tonight's May US inflation data (10.30 pm AEST), headline and core CPI are forecast to rise by 0.1% and 0.4%, respectively

What potential risks does tonight's inflation report pose?

Should the inflation figure prove to be higher than anticipated, or if there are revisions that elevate the figures from April, the market consensus expectation of a 'hawkish pause' from the Fed on Thursday may be threatened. This could possibly be followed by a 25bp rate hike in July.

Headline YoY at 4.8% or higher (10% probability): Get out of the way as the rates market moves to price in a Fed rate hike in June and July (currently only 20bp priced for both). US equity markets will dive while the US dollar will soar.

Headline YoY between 4.4% and 4.7% (25% probability): An uncomfortable outcome that will likely see the rates market price in an increased chance of a rate hike on Thursday (from 18% to 45%).

The US dollar will strengthen, and equities (SPX) should fall between 0.5% to 1.5%, with a greater fall expected if the headline is at the top end of the range, accompanied by a sticky core read, say 5.6% to 5.9%.

Headline YoY between 4.1% and 4.3% (55% probability): A positive outcome for equities and a drag for the US dollar as the market comes closer to the idea that the Fed's tightening cycle is at or near the end.

Headline YoY at 4% or lower (10% probability): The headlines will scream, "Mission Accomplished, the Fed is done!" Stocks will soar, the US dollar will dive, and the rates market will likely start to price in rate cuts before year-end.

S&P 500 technical Analysis

Overnight the S&P 500 reached the August highs that we was originally reported in Mid-April.

"Aware that should the S&P 500 see a sustained break above 4200 (three daily closes above 4200), it would likely see it extend its rally to the August 4327 high."

While we wouldn't be chasing the market higher at current levels ahead of this week's key event risks, a sustained break above the August high, 4327, post the FOMC meeting would likely set up the next leg of the rally towards 4550.

Aware that only a sustained break below support at 4175 (June contract), 4165 (SPX), and 4215 (Sep contract) would negate the positive medium-term outlook.

S&P 500 daily chart

Nasdaq technical analysis

New 52-week highs again for the Nasdaq and, as we continue to note - during the dot com bubble of the late '90s and many others since, when animal spirits take hold, rallies can extend further than expected.

We expect AI mania to remain a driver of the Nasdaq in the months ahead, with the technology still too early in its lifecycle to disappoint relative to expectations.

Pullbacks in AI-related tech stocks and the Nasdaq will likely be viewed as buying opportunities for buyers looking to position for the next leg higher towards the 15,265 high of March 2022.

Nasdaq daily chart

Dow Jones technical analysis

Last week and for the fourth time since April, the Dow Jones broke and closed above the downtrend resistance coming from the bull market 36,952 high.

While it's a positive sign that the Dow Jones has remained above the downtrend, it needs to break above the May 34,257 high, the 34,342 year-to-date high and the December 34,712 high to set up a test of the 35,492 high from April 2022 - before a run at the all-time 36,952 high.

Aware that it would take a sustained break below the 200-day moving average, currently at 32,771, to indicate that the focus for the Dow Jones has returned to the downside.

Dow Jones daily chart

1. TradingView: the figures stated are as of June 13, 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.