Source: Finance Association

On Wall Street, the slang term “sell in May, then leave” has always been used as a creed by many insiders, because historically, the period of worst performance of US stocks every year is the period from May to October. At the same time, this period is also 6 months when US bond yields are strong throughout the year. Relatively high treasury yields also tend to suppress US stock valuations, further increasing the “May sale effect.”

This year started in May, although the overall performance of US stocks was quite strong — the S&P 500 index has accumulated a cumulative increase of about 3.7% during the month, and US bond yields have also declined as a whole. But for the market, the real test may have just begun.

Looking back at the news events of the year so far, there are few things that can determine the direction of the US bond market better than monthly CPI data, and the latest data released this Wednesday is probably no exception. Meanwhile, Federal Reserve Chairman Powell will also bring a number of senior Federal Reserve officials to deliver a speech, which is expected to influence the market's prediction of the next interest rate trend along with CPI data.

Matthew Bartolini, head of American research at State Street Global Consultants, said: “When the Federal Reserve says it relies on data, every time it releases data, it may become a major event affecting the market.”

Is the CPI data a blessing or a blessing?

Many industry insiders said that the April US CPI data released on Wednesday is expected to be the biggest test facing the market rebound beginning this month. At that time, Federal Reserve Chairman Powell dispelled concerns that the Federal Reserve might raise interest rates again in the interest rate decision at the beginning of the month.

However, since then, despite an unexpected surge in data requested by the US, which has once again strengthened the signs of a slowdown in the labor market and further fueled expectations of the Fed's interest rate cuts, some Fed policymakers have continued to shout slogans to maintain high interest rates for a long time. Meanwhile, data released on Friday showed that the initial value of US consumer confidence fell sharply beyond expectations, and inflation expectations unexpectedly rebounded in the coming year, which continued to raise market concerns about the US falling into stagnation.

These latest data evolutions have increased the risk contained in the inflation data to be released this week — if the CPI data shows a welcome decline, it is expected to support the rebound in the stock and bond market so far this month, but if the CPI is further higher than expected, it is bound to increase the industry's anxiety about the risk of secondary inflation and even stagnation.

Bank of America strategists said the market is expected to be in a “waiting mode” before this week's CPI.

State Street Global's Bartolini also stated, “Investors are trying to interpret the situation. This inflation report will be a mini Super Bowl for policy watchers.”

Currently, one of the more worrying phenomena is that almost all of the CPI reports released earlier this year fueled sell-off in the bond market, as higher-than-expected data raised concerns that the Federal Reserve's anti-inflation process would be blocked.

The most recent CPI release was on April 10, when 10-year US Treasury yields soared 18 basis points in just one day, the biggest single-day fluctuation caused by CPI data since 2002. All in all, half of the cumulative increase in 10-year US Treasury yields of more than 60 basis points this year occurred on the day the CPI was released.

Jonathan Cohn, Head of Strategy at Nomura Securities International's US Interest Rate Division, said, “The reality facing the market is that we often fluctuate between data. The US economy does seem to be showing some signs of weakness, but in reality, if we want the market's current rise to continue, we need CPI data to show that inflation has not accelerated again. What we have seen before is that anti-inflation gains are fading away.”

Of course, judging from economists' prior expectations of this CPI data alone, people seem to be quite optimistic that US inflation will cool down after a continuous March rebound. According to the median estimate from the media survey, the US CPI growth rate in April is expected to fall back to 3.4% from 3.5% in the previous month, while the month-on-month growth rate will remain at 0.4%. Furthermore, the slowdown in core CPI growth is likely to be more obvious: the year-on-year increase in core CPI is expected to fall from 3.8% to 3.6%, and the month-on-month increase from 0.4% to 0.3%.

Paul Ashworth, chief North American economist at KITU Macro, also said that fundamentals “still indicate that inflation will weaken.” He said, “We still expect inflation to ease again later this year. Shorter supplier delivery times are consistent with a return to anti-inflation trends for core commodities, while the combination of slower wage growth and faster productivity growth is consistent with falling inflation in non-housing services.”

Some industry insiders said that given the recent rebound in the market, traders may regard any sign that the anti-inflation situation is progressing again as a sign of continued buying. Matthew Luzzetti, chief US economist at Deutsche Bank, predicts that the Federal Reserve will not cut interest rates for the first time until December. However, considering the current trend, investors' sentiment is definitely more dovish.

Powell and other senior Federal Reserve officials take turns

Of course, in addition to the critical CPI data this week, Federal Reserve officials will continue to give “wheel warfare” speeches in turns. Among them, Federal Reserve Chairman Powell is scheduled to deliver a speech at a foreign bankers' event in Amsterdam on Tuesday, which is expected to receive the most attention from investors.

The following is a schedule of Federal Reserve official speeches this week (all Beijing time)

At 21:00 on Monday, 2024 FOMC Voting Committee, Cleveland Federal Reserve Chairman Meister, and Federal Reserve Governor Jefferson delivered speeches on central bank communication;

At 22:00 on Tuesday, Federal Reserve Chairman Powell and ECB Governing Council Member Knott attended the event and delivered a speech together;

At 0:00 on Thursday, Minneapolis Federal Reserve Chairman Kashkari attended a fireside conversation;

At 22:30 on Thursday, Philadelphia Federal Reserve Chairman Huck delivered a speech;

At 0:00 on Friday, 2024 FOMC voting committee and Cleveland Federal Reserve Chairman Meister delivered a speech on the economic outlook;

At 3:50 on Friday, 2024 FOMC voting committee and Atlanta Federal Reserve Chairman Bostic delivered a speech on the economic outlook.

Judging from the latest statements made by Federal Reserve officials last week, most Federal Reserve officials are still cautious on the interest rate issue, and the relevant tone still indicates that the current conditions for cutting interest rates are not yet ripe. Many local Federal Reserve presidents emphasized prudence about inflation and patience with policy decisions in their speeches. In particular, two hawkish representatives — Minneapolis Federal Reserve Chairman Kashkari and Federal Reserve Governor Bowman — even thought that interest rates would not be cut this year.

Federal Reserve Governor Bowman said on Friday that given the trend of inflation, she does not expect interest rate cuts this year. Kashkari, on the other hand, does not rule out the possibility that the Federal Reserve will raise interest rates again if inflation stagnates around 3%.

On the side of dovish officials, Goulsby, who made dovish remarks earlier this year, also made it clear on Friday that rising inflation in the first three months of this year is changing his previous view, that is, inflation is clearly on the path to 2%. Strong consumer spending and employment growth made him wonder whether the economy was trending towards overheating, and whether this situation would continue for a long time or just a flash.

However, Goulsby also emphasized, “In my opinion, there isn't much evidence that inflation will stagnate at 3%. We've hit a bump, and now, I think we'll have to wait.”

Click to make an appointment:Powell speaks at the Bankers Association Annual Conference

editor/tolk