Could US CPI rekindle volatility?

After last week’s big drops in the equity markets, things have definitely calmed down. The major indices across Europe have started the day positively, following a positive close on Wall Street the day before. Stock market participants are probably waiting for further developments in the bond markets, where yields have gone into a bit of consolidation in the past few days following their recent big gains. The focus is clearly on incoming economic data, as investors try and figure out when the next rate increase may be upon us.

Last week, strong jobs and wages data from the U.S. saw investors panic about the prospects of a Federal Reserve rate hike in March. The attention today is on inflation and retail sales data, due for publication at 13:30 GMT or 08:30 ET. The data should provide plenty of volatility for the forex markets anyway, but it could also impact the stock and bond markets, particularly if we see significant deviations from expectations.

CPI & Retail sales forecasts

Headline Consumer Price index (CPI) measure of inflation is expected to have risen by 0.3% in January while core CPI is expected to have risen by 0.2%. On a year-over-year basis, CPI is expected to have eased to 1.9% from 2.1% while core CPI is expected to have moderated to 1.7% from 1.8% previously. Retail sales are seen rising 0.5% while core sales are expected to have gained 0.2% month-over-month.

Likely market reaction

If the numbers show stronger-than-expected readings, then this would reinforce expectations that the Federal Reserve will have little choice but to tighten monetary policy more aggressively. As a result, we may see renewed selling pressure coming into the bond and stock markets, while the dollar could rise against her weaker rivals. Alternatively, however, if the data releases fall significantly short of expectations, then we would expect to see the opposite happen. And finally, if the data matches expectations then it is hard to say exactly how the markets would react, although we do think that the dollar may rise anyway but not too sure about the equity and bond markets’ reaction.

S&P 500 hovers around opening 2018 level ahead of data

The S&P 500 futures (ES) is currently higher on the day, now up for the fourth consecutive session. The ES is testing a key zone of resistance around 2675 to 2700. The lower end of this area was the opening price for this year, while the upper end was a resistance level in the past, which failed to offer support upon initial re-test. After the big drop, the index found resistance here on at least three occasions. Thus, for the bulls to fully regain control, they will first and foremost need to reclaim this pivotal area. Failure to do so means the risk of further falls remains elevated.

It is worth watching 2667.5 for signs of support. This level was yesterday’s high. If we go below it, then the bulls may get in trouble again. It is important to note that the strong rebound has given a lot of trapped bulls the opportunity to come out of their losing trades. So, there is the possibility that those trapped traders may abandon their long positions when the market gives them the opportunity to do so.  So, while things do look and feel rather calm again, don’t take anything for granted.