Limited Appetite for Stocks Ahead of US CPI, Bitcoin at Record High
This week opened with a muted interest in US stocks and Bitcoin reaching a new high. Monday saw the Major US indices largely unchanged, with the S&P 500 dropping slightly by 0.11%.
There was a mixed reaction in technology stocks: Nvidia (NASDAQ:NVDA) fell by 2%, while Google (NASDAQ:GOOGL) rose by nearly 2%. Following the US jobs data, the US dollar saw a recovery, with the 2-year yield stabilizing just over 4.50% and the 10-year yield near 4%, ahead of crucial US CPI data.
Investor apprehension is palpable ahead of the US inflation report, with several factors hinting at a possible disinflation hiccup that could soften Federal Reserve (Fed) policy expectations. Notably, a spike in February’s gasoline prices, changes in CPI calculation methods, and increasing inflation expectations contribute to this concern.
A New York Fed survey highlighted a significant rise in 3 and 5-year inflation expectations, maintaining a steady forecast of around 3% for this year. This suggests that surveyed consumers don’t anticipate a significant decrease in inflation, which could perpetuate the inflation cycle. Economists predict the headline inflation to stabilize at 3.1% year-over-year (y-o-y), with core inflation potentially decreasing from 3.9% to 3.7% y-o-y, though monthly figures could pose a problem.
A data set meeting or falling below expectations could bolster expectations for a Fed rate cut in June, likely lowering US yields and the dollar. Conversely, higher-than-expected inflation data could weaken dovish sentiment, leading to a sell-off in US treasuries and a rise in US yields and the dollar.
In the equities market, volatility is expected to increase as the Fed’s focus on inflation data intensifies. According to Bloomberg, the S&P 500 has shown an average movement of 0.8% up or down following CPI data releases over the last six months, a trend likely to continue.
Meanwhile, Germany is set to release its inflation figures, anticipated to show a lower annual rate but a higher monthly figure. The EUR/USD pair dipped in the previous session, influenced by expectations that the European Central Bank (ECB) may cut rates more aggressively than the Fed due to a weaker economic outlook and reduced wage pressure.
In Japan, the focus remains on potential rate hikes, despite recent inaction by the Bank of Japan (BoJ) to support the yen, signaling a possible shift from its ultra-loose monetary policy. However, BoJ Governor Ueda’s recent comments suggest a moderate economic recovery with some weaknesses, tempering expectations for an immediate rate hike.
On the cryptocurrency front, Bitcoin reached a record high, trading at the $72K level, driven by spot ETF introductions and anticipated halving events. With targets set on the $100K mark, Bitcoin’s rise is supported by demand/supply dynamics, despite lagging use cases.
Its independent market movement offers a diversification option for investors, unaffected by traditional market news and the upcoming CPI report.
In traditional markets, gold is maintaining its gains near record highs. A potential CPI miss could lead to profit-taking and a retreat from current levels, whereas lower yields following a favorable CPI report could prompt another attempt at the $2200 level.
