If CPI in April exceeds expectations, the stock market may suffer a sharp decline

May\’s rally pushed stocks back to near all-time highs. Last month\’s pullback provided temporary relief – with April inflation data set to be released on Wednesday widely seen as a potential catalyst for new highs or another slide. catalyst.
Tom Essaye, founder of Sevens Report Research, analyzed the potential grim, not-so-good and good outcomes for April\’s Consumer Price Index (CPI) reading on Tuesday.
Here\’s the context: Going into 2024, interest rate traders are expecting the Fed to deliver six or more 25 basis point rate cuts before the end of the year.
But a series of higher-than-expected CPI reports and other inflation measures have tempered those expectations – traders now expect about two rate cuts this year.
The stock market largely handled the situation well, but fell back in April.
Stocks rebounded after Federal Reserve Chairman Jerome Powell told reporters on May 1 that raising interest rates was unlikely to be the central bank\’s next move.
So far, the S&P 500 has risen more than 9% this year. It closed on Monday only 0.6% lower than the record of 5,254.35 points set on March 28.
The Dow Jones Industrial Average remains less than 600 points away from the 40,000 milestone. The Nasdaq Composite is up more than 9% year to date.
Whether investors can remain calm about the outlook for interest rates may depend on April\’s data.
Economists surveyed on average expect CPI to rise by 0.4% on a monthly basis in April, with the annual rate slowing to 3.4% from 3.5% in March.
Core CPI, which excludes food and energy, is expected to rise 0.3% monthly. The annual rate slowed to 3.6% from 3.8% in March.
Core CPI data attracts more attention from policymakers and may be the key to market reaction.
Tragic So what triggers a tragic reaction? Essaye believes the threshold is 3.9%.
He wrote that core CPI reaching or exceeding this threshold could trigger a strong sell-off, further reinforcing the idea that inflation is stubborn and interest rates will be higher for a long time.
That could reverse the rally of the past two weeks as investors may scale back rate cut expectations to just one rate cut in December.
It wouldn\’t be surprising for the S&P 500 to fall 1% or more. Every sector is likely to fall. Although defensive stocks may fare better.
He also said that this could cause the 10-year U.S. Treasury yield to jump by 10 to 15 basis points, thereby pushing the ICE U.S. Dollar Index to above 106.
Not good. If the annual core CPI rate is between 3.7% and 3.8%, it will not trigger such a violent reaction. But it may still cause the stock market to fall and government bond yields to rise.
Essaye said such a small decline in inflation would not eliminate concerns that price pressures remain stubborn.
A mild sell-off is likely. While supercap tech and cyclical stocks are likely to perform better. While defensive stocks lag.
Good times If the core CPI annual rate reading is at or below the expected 3.6% level, the market will breathe a sigh of relief.
Essaye said this means core inflation will fall further.
In this case, new highs shouldn\’t come as a surprise. The stock market will extend its rebound from April\’s lows, led by other parts of the market outside of supercap tech stocks.
Essaye said that this may also prompt a sharp decline in Treasury yields. The 10-year yield may fall below 4.4% and return to the 3.75% to 4.25% range earlier this year.
The U.S. dollar index may also come under pressure as investors price in two or three rate cuts in 2024.