The upcoming US CPI data for April on Wednesday is the focus of market attention this week. Analysts believe that Wednesday's CPI data is critical to shaping the Fed's policies and global financial market prospects, and the global market may usher in a shift in inventory.

CPI is expected to ease somewhat in April

Currently, the market generally expects the CPI to ease somewhat in April. Some famous trading departments warned investors that they should prepare for a possible breakdown in the stock market's calm. Some analysts believe that whether the market can continue to rebound may depend on whether investors are positive about cutting interest rates after the CPI data is released.

Analysts at J.P. Morgan Chase said that after the CPI data is released on Wednesday, the S&P 500 index will fluctuate 1% in either direction. The analyst said, “The key risk is that CPI data is overheating. But the upcoming macro data creates a two-way risk — on the one hand, unexpectedly strong growth drives inflation concerns, and on the other hand, weak growth triggers recession or 'stagflation' concerns.”

Other analysts believe that considering further interest rate hikes have been ruled out, the stock market may be able to withstand higher inflation. The data in line with expectations should also be positive for the market, removing barriers to inflation, at least in the short term.

Earlier, analysts at Morgan Stanley and Standard Chartered believed Wednesday's CPI data would fall short of expectations.

Seth Carpenter, chief economist at Morgan Stanley, pointed out that housing inflation accounts for 40% of the core CPI and 18% of the core PCE, so no matter how housing inflation goes, the entire CPI data is likely to follow.

The bank believes that the current rent data is very weak. Despite the surge in immigration last year, the vacancy rate for multi-family apartments is approaching a record high. Housing inflation has already sent a downward signal, and the US CPI will “fall far short of expectations” on Wednesday. Furthermore, due to previous seasonal adjustments, the inflation data for the first quarter was higher than the actual situation, and this will be corrected later.

Standard Chartered Bank analysts also said earlier that housing inflation may soon decline and drive core inflation downward.

The return of “soft landing deals”

Many investors believe that if inflation slows down, US bonds will have more room to rise than US stocks. Although the stock market is close to historical records, the 10-year US Treasury yield is still far above 4% at the beginning of the year.

In recent months, the ongoing problem of inflation has plagued investors. Traders were betting on cutting interest rates up to six times in early 2024, but then they had to quickly reduce those bets as CPI continued to exceed expectations. This shook up the stock market in April and brought bond yields to their highest level since November.

Many investors said the April jobs report allayed some of their concerns as the colder labor market should eventually lead to more moderate price increases. Now, only actual inflation data is needed to support this.

Gennadiy Goldberg, head of US interest rate strategy at TD Securities, said, “The CPI report may greatly advance the claim that interest rate cuts are imminent.”

Analysts believe there is a close link between stocks and bonds. Treasury yields are largely influenced by investors' short-term interest rate expectations set by the Federal Reserve. In turn, stock prices are partly affected by investors' measurement of the risk-free returns they can get from holding US bonds at maturity.

The Dow has risen 4.3% this month, just 1% below the record high set at the end of March. The rise in bond prices reduced the yield on 10-year US Treasury bonds to 4.479% from 4.7% at the end of April.

Bond returns have been disappointing over the past few years as interest rates have risen more than investors expected and have continued longer than expected. Despite this, whenever there are signs that inflation is easing, investors are quick to buy bonds and rush to lock in 4%-5% yield before the Federal Reserve starts cutting interest rates.

Ed Perks, chief investment officer of Franklin Yield Investors, said that if the data shows a slowdown in inflation, he expects the yield on short-term US bonds to fall by 0.2 to 0.25 percentage points, and the yield on long-term US bonds may drop by 0.1 to 0.2 percentage points.

At the same time, he said, “Given current stock valuations, it is more difficult for stocks to rise significantly.” As a result, he added, stocks may have more room to fall if inflation is higher than expected again.

George Mateyo, chief investment officer at Key Private Bank, said that given that bad reports could hurt both the US stock market and the bond market, it is still wise to have unconventional assets — such as real estate, inflation-protection bonds, or international stocks — to hedge against a resurgence of high inflation readings.

“We think inflation will be somewhat stubborn,” he said.

The European stock market will also usher in a change of inventory

Morgan Stanley recently released a research report saying that the “Santa” market in the European stock market, which began at the end of 2023 and is dominated by bond yield-sensitive stocks, has recently returned, and this week's US CPI data will be the key catalyst for determining the success or failure of this transaction.

According to the research report, several historical prerequisites for a recovery in bond yield-sensitive stock performance have been met: first, the inverse correlation between stocks and bond yields soared to an all-time high, plus bottom/recovery in the breadth of profit revisions, improvements in macroeconomic indicators, technical oversales, and a major repricing of expectations for the Fed to cut interest rates. Furthermore, credit spreads in some of the most sensitive parts of the market, such as real estate, have narrowed significantly, which is a good leading indicator of stock performance.

However, the most important prerequisite for a continued rebound in this category of stocks is still the reduction in US inflation data. The research report said that initial signs have been seen so far. The recent non-farm payrolls data were lower than expected and the increase in unemployment claims last week all contributed to the initial recovery of European stock bond yield-sensitive stocks.

Still, Wednesday's US CPI data will be the key catalyst. Morgan Stanley expects core CPI growth to slow to 0.29% month-on-month in April (0.36% last time, expected 0.3%), and data that meets or falls short of expectations will drive a continued rebound in European bond yield-sensitive stocks.

Editor/Somer