S&P 500: Will inflation data surprise the markets? – London Business News | Londonlovesbusiness.com

The S&P 500 has reached a critical trading zone, testing the 5300 resistance level in conjunction with the release of the latest inflation data.

This movement comes as the Federal Reserve and market investors digest the latest economic indicators, casting uncertainty over potential interest rate adjustments.

The index price fell to 5271 during Wednesday’s trading after bouncing back from the mentioned resistance.

Recent inflation data showed a significant slowdown, with the core consumer price index (CPI) rising by 0.3% in April. This reading is notable compared to previous months, representing the first slowdown in six months.

On an annual basis, the core CPI increased by 3.4%, the slowest pace in three years, primarily driven by housing and gasoline costs. Retail sales stagnated in April, reflecting higher borrowing costs and cautious consumer spending.

Therefore, I believe the weak inflation data has boosted market optimism, leading to a rise in U.S. stocks. The S&P 500 rose by 1.2% to close above 5300 points for the first time in history last week. Technology, real estate, and healthcare stocks led these gains, while consumer stocks declined. Additionally, the Nasdaq Composite reached a record high, driven by strong performance in tech stocks.

In my opinion, the latest U.S. consumer price index report has provided some relief to Federal Reserve officials, following recent pressures to control price increases. Federal Reserve Chairman Jerome Powell emphasized the need for patience, suggesting that interest rates might not be cut soon. However, market investors are currently anticipating a significant possibility of an interest rate cut later this year, with the likelihood of a cut in September rising to about 60%.

I believe the recent economic data could pave the way for a potential rate cut later this year. However, more data readings indicating a decline in inflation are necessary before the Federal Reserve moves towards monetary easing.

This week, on Friday, the U.S. Personal Consumption Expenditures (PCE) price index, the Fed’s preferred inflation measure, will be closely watched. It is expected to reflect recent trends but might show a smaller increase due to its significant importance to the markets.

I think continued moderation in inflation could lead to a shift in Federal Reserve policy towards flexibility. However, persistently high housing costs remain a concern for the Fed.

A continued decline in inflation could boost consumer and business confidence, potentially leading to increased spending and investment. However, if inflation proves to be persistent, the Federal Reserve might have to maintain higher interest rates for an extended period, slowing economic growth and strengthening the dollar, thereby negatively impacting metals, stocks, and indices in the long term.

While the recent inflation data is a positive step, the markets and the Fed need to see sustained improvement before rate cuts and monetary easing can begin. Investors should prepare for potential volatility as the market adjusts and prices in new economic data.