Stocks Waver as Traders Map Out Game Plan for CPI: Markets Wrap

(Bloomberg) — Stocks fluctuated at the start of a week that will bring inflation data seen as key in shaping the outlook for Federal Reserve policy.

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Equities struggled for direction just a few days ahead of the consumer price index, which is expected to show inflationary pressures have eased while still remaining too high to warrant rate cuts. On Monday, a Fed Bank of New York survey highlighted an increase in US consumer expectations for inflation and home prices.

JPMorgan Chase & Co.’s trading desk says investors are gearing up for big S&P 500 swings after the CPI report, according to Andrew Tyler. Daily breakevens in the options market show traders are betting the stock index will move 1% in either direction after the data.

“The key risk is a hotter CPI print,” Tyler said. “But upcoming macro data creates a two-tailed risk — with one tied to stronger-than-expected growth fueling inflation concerns and the other being weaker growth fueling either recession or ‘stagflation’ concerns.”

The S&P 500 hovered near 5,220. Unprofitable and heavily shorted names rallied as GameStop Corp. soared after a cryptic X post from Keith Gill, known as “Roaring Kitty,” who gained gained notoriety during the 2021 meme-stock frenzy. US 10-year yields fell one basis point to 4.48%.

“This week’s all-important inflation data arrive just as a three-week rally has the S&P 500 knocking on the door of its March record highs,” said Chris Larkin at E*Trade from Morgan Stanley. “An extension of the rally could depend on whether investors still feel positive about rate cuts after this week’s numbers.”

Ahead of CPI, economists will parse data on producer prices Tuesday to assess the impact of categories such as health care and portfolio management that feed into the Fed’s preferred inflation gauge — the personal consumption expenditures price index. Fed Chair Jerome Powell is scheduled to speak on the same day.

Stalled-out progress on inflation is probably going to trigger a decline in US equities in the coming months, according to Stifel Nicolaus & Co.’s Barry Bannister.

The S&P 500 will likely drop roughly 10% in the second or third quarter to around 4,750. With Stifel projecting a mid-year increase in a key inflation gauge, the firm’s models indicate monetary easing will be further delayed, causing equities to slide.

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A “merely in-line” US inflation report this week “would likely be enough for further risk-asset gains,” according to HSBC strategists led by Duncan Toms.

To Robert Teeter at Silvercrest Asset Management, until the Fed provides clarity on a timeline for cuts, investors should prepare for some jolts if this Wednesday’s CPI or subsequent inflation readings disappoint.

“If inflation remains above 2% in the months ahead and labor holds steady, the Fed may use August’s Jackson Hole meeting to outline a nuanced plan to alleviate restrictiveness, conceivably followed by a first cut in September,” Teeter noted.

The “set up” we’re seeing in the stock market has left it at a critical juncture, according to Matt Maley at Miller Tabak + Co. The fact that equities saw a material decline in April, followed by a nice bounce leaves them vulnerable to a “double-top,” he noted.

“Double-tops are one of the most bearish signals we see in technical analysis,” Maley said. “If this week’s inflation data creates a substantial reversal, it’s going to be a very negative development. If, however, this week’s data creates a further rally — one that pushes the major indices meaningfully above their 2024 highs — it’s going to be extremely bullish.”

Meantime, hedge funds ramped up their selling of financial stocks as US economic growth shows signs of weakness and the sector approaches a key technical level.

Despite financials notching their best weekly gain of 2024, hedge fund managers net sold for the third straight week — the largest bout of net selling in two months — data compiled by Goldman Sachs Group Inc.’s prime brokerage desk for the week ended May 10 show. The funds have sold the sector short in 14 of the last 16 weeks.

Investors ready to trim or ditch their stock exposure because they are worried the S&P 500 is losing steam after a double-digit run up since October should look to history for reasons to stay committed to their US equity allocations.

Since the 1930s, missing out on the 10 best days per decade for the benchmark would have yielded a 66% gain — a fraction of the roughly 23,000% return staying invested through those days would have generated, according to data from Bank of America Corp. More importantly, those best days have come after the worst days for stocks, when selling was likely most tempting, the bank’s analysis showed.

“Market timing is fraught with peril, and panic selling results in outsized opportunity costs,” Savita Subramanian, head of US equity and quantitative strategy at BofA, said in a note to clients on Friday. “‘Time in the market beats timing the market’ is an old but prescient adage.”

In a week that also sees the release of April readings for and retail sales, guidance provided by giants Walmart Inc. and Home Depot Inc. will provide some insight into consumer sentiment amid signs of rising joblessness.

Historically, consumer confidence has moved inversely to the two-year/10-year US Treasury yield spread, according to Lisa Shalett at Morgan Stanley Wealth Management.

“With curves likely to steepen when rate cuts start, which we forecast by September, it’s unclear whether consumers will view good news as good news or whether cuts will come too late — when consumer moods have worsened as excess savings have been depleted and when a recoupling of the relationship indicates recession, not a soft landing,” she noted.

Corporate Highlights:

• Apple Inc. has closed in on an agreement with OpenAI to use the startup’s technology on the iPhone, part of a broader push to bring artificial intelligence features to its devices, according to people familiar with the matter.

  • Apple is preparing to start selling the Vision Pro in markets outside the US, testing whether the $3,499 mixed-reality headset has broader appeal.

• Intel Corp. is in advanced talks with Apollo Global Management over a deal that would have the investment firm providing more than $11 billion in funding for a chip manufacturing plant in Ireland, the Wall Street Journal said.

• Johnson & Johnson is selling bonds to help finance its $13.1 billion acquisition of Shockwave Medical Inc., the latest blue-chip firm to seize on thriving debt markets to fund purchases.

• Nasdaq Inc. is considering a sale of Solovis, a provider of portfolio-management software and services, as the exchange operator seeks to slim down following its largest-ever acquisition, according to people familiar with the matter.

• Walgreens Boots Alliance Inc. is reaching out to potential buyers of the £7 billion ($8.8 billion) Boots drugstore chain in the UK, according to people familiar with the matter.

• UBS Group AG Chief Executive Officer Sergio Ermotti intends to stay at the helm of the Swiss bank until the task of absorbing Credit Suisse is complete, meaning he could be in place until early 2027.

• Anglo American Plc rebuffed a sweetened takeover offer from BHP Group Ltd. that valued it at about £34 billion ($43 billion), leaving it up to the Australian miner to make a better bid or lose out on what could be the industry’s biggest deal in a decade.

• Takeda Pharmaceutical Co. agreed to develop AC Immune SA’s immunotherapies targeting toxic, abnormal proteins in Alzheimer’s patients’ brains in a licensing deal worth as much as $2.2 billion.

Key events this week:

• Germany CPI, ZEW survey expectations, Tuesday

• Bank of England Economist Huw Pill speaks, Tuesday

• US PPI, Tuesday

• Fed Chair Jerome Powell and ECB Governing Council member Klaas Knot speak, Tuesday

• China rate decision, Wednesday

• Eurozone industrial production, GDP, Wednesday

• US CPI, retail sales, business inventories, empire manufacturing, Wednesday

• Minneapolis Fed President Neel Kashkari speaks, Wednesday

• Japan GDP, industrial production, Thursday

• US housing starts, initial jobless claims, industrial production, Thursday

• Philadelphia Fed President Patrick Harker speaks, Thursday

• Cleveland Fed President Loretta Mester speaks, Thursday

• Atlanta Fed President Raphael Bostic speaks, Thursday

• China property prices, retail sales, industrial production, Friday

• Eurozone CPI, Friday

• US Conf. Board leading index, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 was little changed as of 12:04 p.m. New York time

• The Nasdaq 100 rose 0.2%

• The Dow Jones Industrial Average was little changed

• The Stoxx Europe 600 was little changed

• The MSCI World index rose 0.1%

Currencies

• The Bloomberg Dollar Spot Index was little changed

• The euro rose 0.2% to $1.0796

• The British pound rose 0.3% to $1.2561

• The Japanese yen fell 0.3% to 156.17 per dollar

Cryptocurrencies

• Bitcoin rose 2.9% to $63,079.21

• Ether rose 1.4% to $2,962.25

Bonds

• The yield on 10-year Treasuries declined one basis point to 4.48%

• Germany’s 10-year yield was little changed at 2.51%

• Britain’s 10-year yield was little changed at 4.17%

Commodities

• West Texas Intermediate crude rose 0.9% to $78.95 a barrel

• Spot gold fell 1% to $2,336.63 an ounce

This story was produced with the assistance of Bloomberg Automation.

–With assistance from Jessica Menton, Alexandra Semenova, Natalia Kniazhevich, Vince Golle and Craig Stirling.

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