Inflation Watch: Market Holds Breath as CPI Data Looms, Shaping Fed's Next Move

📝 SUMMARY: The momentum in the stock market has hit a pause as investors brace for the latest inflation figures ahead of the next Federal Reserve decision. After achieving record highs 16 times in the current year, the S&P 500 ($.INX) has experienced a minor retreat, reflecting investor caution and the anticipation of potential market adjustments. This period of consolidation is seen as a natural recalibration following the significant gains, with experts like Jason De Sena Trennert from Strategas noting the existing signals of an overstretched market.

Amidst this backdrop, the focus is on the forthcoming consumer price index (CPI) data, which is crucial for gauging the direction of Federal Reserve rate adjustments. The market's response to the CPI data has grown more volatile, highlighting the increasing uncertainty around inflation trends and the Fed's monetary policy. A recent survey by 22V Research found that a significant portion of investors anticipates a "risk-off" reaction to the CPI announcement, indicating a cautious outlook.

Despite the market's wariness, sentiment indicators suggest a level of optimism or even "frothiness," with some viewing any upcoming market dips as potential buying opportunities. This optimism is supported by the performance of major tech companies, which have helped temper sky-high valuations through robust profits. The so-called "Magnificent Seven" tech stocks, for example, are trading near their average price-to-earnings ratio since 2015, easing some concerns about unsustainable valuations.

Additionally, the market's breadth has been improving, suggesting a more balanced and broad-based investor interest across various sectors and stocks. This diversification reflects a strategic shift among investors, seeking opportunities beyond the high-flying tech sector.

The anticipation of the CPI data has also impacted the bond market, with yields on 10-year Treasuries reacting to investor expectations and economic indicators. The bond market's outlook remains positive, with a majority expecting lower yields in the near future, indicating a continued appetite for bonds amid uncertainty in the equity markets.

As the market navigates through these complexities, the overarching narrative remains one of cautious optimism, with investors closely monitoring economic indicators and adjusting their strategies accordingly. The upcoming inflation data will be a critical factor in shaping the Fed's policy moves and the market's trajectory in the coming months.

🔍 SOURCE: https://www.bloomberg.com/news/articles/2024-03-10/asian-stocks-to-fall-as-us-cpi-shifts-into-focus-markets-wrap?srnd=markets-vp