Source: Jin10 Data
Since 2008, there have only been 13 occasions when CPI and Federal Reserve decisions were announced on the same day. In these rare "collision" days, the performance of the US stock market is so amazing...
Wall Street is preparing for two rare economic events on Wednesday. The consumer price index (CPI) for May will be released in the morning (local time), and the Federal Reserve will announce its latest policy decision in the afternoon.
Both CPI and Federal Reserve decision days are known for market volatility, but they rarely occur simultaneously. According to Dow Jones Market Data, since 2008, there have been only 13 instances when CPI reports and Federal Reserve policy decisions were released on the same day.
Although the sample size is small, according to Dow Jones Market Data (see table below), the three major US stock indexes tend to rise on these days: the S&P 500 Index (SPX) rises an average of 0.7%, the Dow Jones Industrial Average (DJIA) rises an average of 0.9%, and the Nasdaq Composite Index (COMPANEX) rises an average of more than 1%.
Despite the rare event on Wednesday, some strategists expect volatility in the US stock market to be no greater than usual.
Dave Sekera, chief US market strategist at Morningstar Research Services, said that if Fed Chairman Powell "said something unexpected" at the press conference, it could push volatility higher on Wednesday. "But I think the odds of that happening are very low because he (Powell) is always very careful in his comments," Sekera said in an email comment on Monday.
At the same time, if the CPI inflation indicator meets or exceeds expectations, it may bring some positive market sentiment. However, considering the current market high valuation, Sekera and his team do not expect this to happen, because the US stock market has very little short-term upside potential. But if these inflation indicators are significantly higher than expected, it may lead to a slight dip in the stock market, "but this also depends on how much higher the inflation is than the consensus," Sekera said.
Economists surveyed by The Wall Street Journal predict that the Consumer Price Index (CPI), which measures the level of prices paid by Americans for goods and services, will rise slightly by 0.1% in May. This increase will be the smallest in seven months and the second consecutive month of slowing inflation. Core CPI, which excludes the more volatile food and energy prices and is closely watched by economists and the Fed, is expected to rise for a second consecutive month by 0.3% in May.
The average decline of the S&P 500 Index and the Dow Jones Industrial Average on the last five CPI days this year was 0.02% and 0.18%, respectively. This contrasts sharply with the 10-year average increase (0.02%) and decline (0.06%) on CPI days.
So where does the reputation for volatility on CPI day come from?
In 2022, the volatility of the CPI day was obvious, as the hot inflation data triggered the beginning of the Federal Reserve's interest rate hiking cycle. In 2022, the average increase and decrease of the S&P 500 Index on CPI release day was 1.9%. According to Dow Jones Market Data, the median volatility was 1.7%.
The volatility of CPI day in 2023 has eased, but it has been high this year. As shown in the table below, according to Dow Jones Market Data, the S&P 500 Index and Nasdaq Index have both experienced about 1% bilateral volatility on four of the five CPI release days so far this year.
At the same time, the market performance on Federal Reserve policy decision days this year is also puzzling. On March 20, after the Federal Reserve reiterated its prospect of three rate cuts in 2024, the S&P 500 and Dow Jones Industrial Average both rose more than 1%, and the three major U.S. stock indexes all closed at record highs.
However, according to Dow Jones Market Data, the average increase of the S&P 500 Index on three Federal Reserve decision days this year was only 0.1%, while the average decline of the Dow and Nasdaq during the same period was around 0.4% (see table below).
According to a survey by 22V Research conducted tonight, most of the surveyed investors bet that the CPI and Federal Reserve decisions will stimulate "risk preference". "63% of investors believe that the Fed will cut interest rates because of a soft landing in the economy and that the inflation rate is moving towards less than 3%, which is beneficial to the Fed, so it will cut interest rates because the policy does not need to be so strict," said Dennis DeBusschere of 22V.
Strategists at HSBC said that due to uncertainty about interest rate prospects, sentiment and position indicators indicate that the US stock market may experience a short-term pullback, and they recommend buying on dips. "We expect any weakness in risk assets to be short-lived and shallow, and we think this is a pretty good tactical (re)entry point," said the team, including Duncan Toms and Max Kettner.
Bank of America's clients became net buyers of US stocks for the first time in six weeks last week, led by individual investors and hedge funds. Bank of America's strategy team said they bought $1.9 billion of US stocks, with funds flowing into individual stocks and exchange-traded funds. At the same time, Bank of America's corporate clients bought back the second-largest weekly amount of buybacks since 2010 last week, and have exceeded seasonal levels for 13 consecutive weeks.
"Despite mixed signals from technical indicators, economic data, inflation, and global central banks, the market continues to lean upwards," said Chris Senyek of Wolfe Research. "Investors' 'can't lose' attitude is likely to persist in the foreseeable future as they believe economic prospects will improve, and/or the Fed will cut rates."
Editor/tolk