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Equity Bulls Look to Extend Post-CPI Rally Amid Soft Economic Data Week

Published 05/20/2024, 02:12 AM

Equity bulls around the globe celebrated in style the softer-than-expected US CPI data last week.

The global equity rally was further juiced by the expectation that a softer inflation in the US would not only allow the Federal Reserve (Fed) to start cutting the rates this year, but also allow the other major central banks, like the European Central Bank (ECB) and the Bank of England (BoE), to carry on with their plans to cut their own rates and – maybe – cut more than people think they could.

The S&P 500, Nasdaq 100, and Dow Jones renewed records last week, the Big US retailers' quarterly results hinted that consumer demand may be coming to a slippery ground, the latter sent Walmart (NYSE:WMT) shares to a fresh high last week after the announcement of its Q1 results.

Macy’s, Lowe’s (NYSE:LOW) and Target earnings are due this week and could come to cement the ‘troubled outlook for spending’ story – that could continue to butter the bread of the Fed doves and further fuel the reflation trade that benefits grandly to the stocks at this side of the Atlantic Ocean as well.

The European Stoxx 600 and the British FTSE 100 followed suit with fresh records, the treasuries had their best month this year and the US dollar fell.

But note that the US 2-year yield rebounded past the 4.80% level the greenback kicks off the week under some selling pressure, and the US Dollar Index held ground above a major Fibonacci support, the 38.2% retracement on the YTD rally that distinguishes the YTD positive trend from a medium-term bearish reversal.

The soft CPI data could’ve certainly marked the end of this year’s positive trend but people still took into consideration that the producer price data released just a bit earlier than the US CPI last week came in hotter-than-expected and as JP’s Jamie Dimon said ‘costs link to the green economy, remilitarization, infrastructure spending, trade disputes, and large fiscal deficits may mean inflation will stay sticky’. And he is probably right.

But regardless of the warnings, the equity market cleared an important barrier to the present optimism and is looking to jump over the next big barrier – Nvidia (NASDAQ:NVDA) earnings – this week. Nvidia is expected to reveal another blowout quarter where sales may have hit the $24bn mark. Remember that big AI spenders like Meta (NASDAQ:META) said earlier in this earning season that they will be spending more on AI.

The latter hinted that demand for Nvidia’s AI chips may remain sustained for some more time. Price-wise, Nvidia gained more than 700% since the beginning of last year on AI boom and is trading at a spitting distance from the $1000 per share level. This week’s results will either send the share above this $1000 level or trigger profit taking near it. But any misstep from Nvidia – which has been the icon of the AI rally – has the potential to trigger a broader market selloff, especially across the technology stocks.

Note that, the price-to-estimated earnings of the S&P 500’s technology sector bounced above the 28 level, which has acted as an important resistance since 2020. Therefore, the current levels could well be appropriate for a correction. And a potential disappointment from Nvidia could pull that trigger.

Also this week…

Canada and the UK are due to announce their latest CPI updates on Tuesday and Wednesday respectively, the Reserve Bank of New Zealand (RBNZ) is expected to maintain its policy rate unchanged at 5.50% and the FOMC is scheduled to release the minutes of its latest meeting. Inflation in the UK is expected to have fallen from 3.2% to 2.1% in April. If that’s the case, the BoE rate cut bets could take a lift and limit Cable’s upside potential before the 1.28 mark.

Elsewhere, the EUR/USD rallied and stepped into the bullish consolidation zone last week on the back of a softer-than-expected US inflation, but sees resistance into the 1.09 mark. Released last Friday, the series of inflation numbers from the Eurozone came with no surprise. Inflation in the Eurozone eased in April, keeping the prospects of a June rate cut well alive. The divergence between the ECB and the Fed outlooks narrowed slightly due to a softer-than-expected US CPI report, but it could not suffice to justify an extension of gains toward the 1.10 psychological mark.

In commodities, US crude rebounded and is testing the $80pb psychological offers this morning. The dovish central bank expectations continue to support the reflation trade, which in return is supportive of energy and commodity prices.

Fresh Chinese stimulus measures aiming to address the country’s heavily bleeding property market, and the latest – and better-than-expected – rebound in Chinese industrial production also support the rally in commodity prices. The copper futures begin the week at fresh ATH and the CSI 300 index is pushing higher this Monday, as well.

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