European and American stocks kicked off the week with a pause, as investors took a breather after sending major stock indices in these regions to record highs. The Stoxx 600, the S&P 500 and Nasdaq 100 all retreated from an ATH level on Monday. MAMAA stocks were down around 1%, Amazon (NASDAQ:AMZN) – which had it first day at Dow Jones Industrial index fell 0.15% whereas Nvidia (NASDAQ:NVDA) managed to eke out a small gain.
It feels like there is a moment of calm and silence in the aftermath of major tech earnings, investors will decide whether this rally deserves to continue higher straight away. The week brings some important economic data on the table. The US will release its latest growth and inflation updates this week. And favorable data – meaning resilient but not abnormally strong growth, coupled with softening inflation, would allow the market bulls to surf on the ‘goldilocks’ wave. If that’s the case, we could see the stock market rally continue, and to broaden to sectors other than the technology stocks. The equal-weighted S&P 500 index could make an attempt to catch up the technology-heavy S&P 500. If not, if growth is resilient, but inflation ticks higher in a way that’s concerning for the Federal Reserve (Fed) expectations, we could see profit-taking and a downside correction across major US indices, and selling could spill over to the other major stock markets.
But there are concerns regarding – not the strength of the US growth, but inflation’s trajectory. The US economy is expected to have grown 3.3% in Q4 – lower than the 5% printed a quarter earlier but still a very strong growth for an economy that has experienced the most aggressive rate hiking cycle of its modern history. And the core PCE – which excludes food and energy prices – is expected to jump by most in a year. Three and six-month inflation – which both fell below the Fed’s 2% target recently- are also expected to spike above this 2% level. An uptick in inflation is not good news for the Fed doves, who already dropped the expectation that the Fed would cut rates by March, and then by May, and now they are trimming the June cut expectations. The expectation of a June Fed cut is given around 60% chance before this week’s inflation figures are released. This probability was around 70% just yesterday.
US GDP data is due Wednesday, and inflation on Thursday. Before that, today, we will have an insight on the durable goods orders, house prices and the Richmond Fed manufacturing index. Voila.
The US 2-year yield is just around 4.70%, the 10-year yield is a touch below the 4.30% level. Yesterday’s 2 and 5-year US auctions both settled at higher yields, as supply was heavy both in government and corporate bond sales. Vanguard’s intermediate-term treasury ETF saw the biggest weekly inflow on record as investors continued to scale back their Fed cut expectations fearing that a hotter-than-expected inflation read this week could spoil the market mood. Softening Fed expectations caused outflows from short and ultra-long-term bonds to medium-term papers.
And speaking of inflation, inflation in Japan fell to a 22-month low. The Bank of Japan (BoJ) is in no rush to hike the rates this April. The USDJ/PY is getting comfortably near the 150 level, as the Nikkei 225 consolidates near ATH levels.
In commodities, US crude saw support near the 100-DMA yesterday, but appetite remains insufficient to push the price of a barrel to and above the $80pb level. Nat gas futures remain under pressure as investors remain reluctant to buy the dip even near the current oversold levels. Iron ore prices, on the other hand, fell to the lowest levels since November – warnings regarding China’s inability to boost its property sector despite stimulus.