June 28, 2022

US Stock Market Rebound Facing Inflation Test

Next week will bring a major test for the US stock market rally that helped lifting it from the edge of a bear market. This is when consumer price data (CPI) will give some insight into how long the Federal Reserve will continue its aggressive tightening of the monetary policy for battling against the highest possible inflation numbers seen in the country in decades. Even though the major US indexes have had a rather rocky week, there was still a 5% increase in the S&P 500 as opposed to the previous month. The benchmark index had come down last month from its all-high by about 20%.

After making a new all-time high record on January 3rd, the S&P 500 is now 14% down and its losses for the past week amounted to 1%. There could be an upside in the market if investors see some progress from policymakers in stemming the surging prices. Indications of continued inflation could drive the Fed to become even more aggressive when it comes to tightening its monetary policy. This could end up spooking the market, which is already taking a beating because of the possibility of a slowdown in economic growth due to the hawkish stance of the Federal Reserve.

Investment strategists are of the opinion that unless inflation shows some signs of slow down, the market would be range-bound. Most of them are favoring stocks with a large capitalization, as compared to smaller ones because the former can deal with higher wage and input costs. Therefore, the inflation data scheduled for release next week is going to make a big difference because it will chart the course for the future. There was an 8.3% increase in the consumer price index (CPI) annually in the 12 months leading to April. The prior month had seen this number at 8.5%, which was the highest in 40 years.

The inflation report due on Friday for the month of May will be one of the most crucial pieces of information that will come to light before the meeting of the Federal Reserve, which is scheduled from June 14th to 15th. This is when they are expected to increase the rates once more by about 50 basis points. Market analysts said that if inflation does not slow down, the Fed will not have any reason to slow down his year and if they continue increasing interest rates, it would mean more problems for the market.

This year, the Federal Reserve has already tightened monetary policy by almost 75 basis points and now investors are awaiting the CPI report to determine what impact would be seen in growth. Friday saw employment data released, which showed that more people were hired by US employers than had been expected and wage increases had also been quite strong. Such strengthening indicators are not likely to sway the Federal Reserve from their path. Meanwhile, the market has been weighed down by the pessimistic views of top business leaders like Elon Musk of Tesla and Jamie Dimon of JPMorgan and Chase.

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