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Find out why a retreat in US price growth won't necessarily boost markets
After Friday’s sell off in US stocks, this adds to our view that the bear market rally we have witnessed in recent weeks may have fizzled out. The bear market rally helped stocks regain some recent losses in the last full trading week of May, however, as we have mentioned, there are too many external risks to drive a sustained rally in risky assets. Rallies during a bear market can be tricky beasts to navigate. Firstly, you tend to see sharp rises in asset prices until they reach a certain resistance zone when the selling sets in once again. That is what we saw last week. Going forward, we may see further pops higher is risky assets in the coming days, as bear market rallies can last for several weeks. However, overall, we think that the market will lack direction for some time yet. The key driver of sentiment this week is likely to hinge on Friday’s US CPI report when we will learn if price growth in the US has finally peaked.
Key levels to watch for in the S&P 500
As we have already discussed, a bear market rally tends to fizzle out as the market gets nervous about pushing the price too high. This is when important technical levels come into play. For example, the S&P 500 managed to retrace 23.6% of its recent decline in last week’s rally, however, this is an insignificant Fibonacci level. It was interesting that the market didn’t push to the 38.2% retracement level, which is a key Fibonacci level, at 4240 level, instead the rally fizzled out around the 4180 level. This suggests a lack of upward momentum, which is why bear market rallies need to be treated with caution. We continue to think that 4240 will remain a key resistance level that will be tough to beat in the current environment.
In this economic cycle there are so many risk factors to creep up on investors including global central bank rate hikes, high inflation and the threat of a recession, which is why the fear trade remains. This does not mean that some individual stocks and sectors won’t do well. If you are trying to pick winners, then you should look to individual stocks rather than stock market indices when you trade. This is because indices that trade a broad range of sectors and stocks need benign economic conditions to lift all stocks in unison. In our view, this is not the right environment for this to happen.
US economic data watch: May CPI
Economic data in the US has been giving mixed signals of late. Economic and consumer sentiment is at a record low, while US payrolls data for May was stronger than expected. Overall, US economic data has been underwhelming expectations, according to the latest Citi Economic Surprise index, which suggests that the economy is weakening in the US, even if there are pockets of strength. It is worth noting that the labour market tends to be a lagging indicator, thus it could take some time for employment levels to fall. But while labour market data strengthens the Fed’s hand when it comes to further rate rises, the US inflation report due this Friday is what everyone is watching. The market wants to know if inflation has peaked. Economists expect that headline CPI rose by 0.7% last month, with the annual rate falling to 8.2% from 8.3% in April. More importantly will be the core rate of inflation, which is expected to rise by 0.5%, with the annual rate falling to 5.9% from 6.2% in April.
Why US inflation may not calm markets
If the estimates of US inflation are correct, then it may give some flicker of hope that inflation in the US has peaked. While petrol and food prices are expected to have continued to rise in May, downward forces on inflation are expected to include autos and a loosening supply chain. However, we think that even if inflation does show that it may be in retreat, there is still a lot of concern out there that it could continue to be a problem for the long term. While Opec has announced that it will boost its production by more than expected later this year, energy supply constraints remain. Likewise, supply chain issues in China could still bite the West in the coming months. Thus, we do not expect a decline in US prices to spur a long-term rally in risky assets, however, we may see the dollar decline slightly.
Meta in trouble without Sandberg on the ship
Overall, we could see European stocks follow US stocks lower at the start of the new week. We will talk about this week’s ECB meeting in another note; however, it is worth looking at Meta’s stock price at the start of this week. Meta’s share price dived on Friday, falling more than 4% after the news that Meta’s second in command, Sheryl Sandberg, was leaving the corporation. She is considered the main reason why Facebook was able to pivot to a revenue generating machine in the last 14 years, and many analysts believe that she is the secret ingredient to FB’s success. However, without his right-hand woman, Mark Zuckerberg looks increasingly lonely in the embattled firm. It’s share price has dived, in line with many other social media firms. However, with a key figure in its revenue control centre now gone, and its plans for its ‘Metaverse’ still vague, its hard to see how this news won’t lead to another leg lower for the Meta share price.
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