Stocks grind towards record highs in inflation-heavy week.
Global stocks neared record highs on Monday, in a week where inflation figures could make or break expectations for earlier U.S. rate cuts, while Chinese activity data will test optimism about a sustained recovery in the world’s No. 2 economy.
While U.S. inflation data will take centre stage, reports on Chinese retail sales and industrial output could also have a big impact on overall investor sentiment.
Chinese authorities are also set to sell 1 trillion yuan($140 billion) in longer-dated bonds to help fund stimulus spending at home.
The improved sentiment has helped lift Chinese blue chips to a seven-month high and the positive vibes carried over into Europe, where the STOXX 600 held near record highs and U.S. stock futures rose 0.1%.
“U.S. equity traders, along with bond, gold, and dollar traders (well, everyone really), will be looking to start the week by massaging exposures ahead of U.S. PPI, and CPI and retail sales,” Pepperstone strategist Chris Weston said.
The MSCI All-World index nudged higher on Monday and is now less than 0.5% away from March’s record highs.
Globally, much now depends on whether the U.S. April inflation report will show a moderation after three months of upside surprises. Median forecasts are for core consumer prices to rise 0.3% in the month, compared with 0.4% in March, pulling the annual rate down to 3.6%.
So crucial is the data that rounding to the second decimal place could make all the difference.
“Our unrounded core CPI forecast at 0.27% m/m suggests larger risks for a dovish surprise to a rounded 0.2% increase,” noted analysts at TD Securities.
A low number would likely boost bets that the Federal Reserve could ease as soon as July, which is currently priced at only a 25% chance. Equally, a high inflation print could push a rate cut out past September and challenge pricing for 42 basis points of easing this year.
Also due are figures on U.S. producer prices, retail sales and jobless claims, along with final reports on European inflation that should reinforce expectations for a June rate cut from the European Central Bank.
There are a host of Fed speakers this week to update markets on their thinking, including Fed Chair Jerome Powell, who appears with the head of the Dutch central bank on Tuesday.
Upbeat Us Earnings
With 80% of the S&P 500 having reported results, companies are on track to have increased earnings by 7.8%, well ahead of the April expectation of 5.1%.
Once Nvidia (NVDA) reports on May 22, quarterly earnings from so-called Magnificent Seven firms are on track to jump 49%, according to LSEG data.
Companies reporting this week include Walmart, Home Depot and Cisco.
Global share indices have also bounced to record highs in recent weeks, even as markets scale back some of their more aggressive wagers for rate cuts this year.
“A straightforward interpretation of financial market performance is that there is more underlying strength in the global economy than had been anticipated and higher interest rates are reflecting rather than impeding global growth,” says Bruce Kasman, head of economic research at JPMorgan.
“We lean in this direction as our 2024 growth and policy rate forecasts both move higher.”
The relative outperformance of the U.S. economy continues to underpin the dollar, while only the threat of Japanese intervention is stopping it from re-testing the 160 yen barrier.
The Bank of Japan on Monday sent a hawkish signal to markets by cutting the amount of Japanese government bonds it offered to buy in a regular operation, pushing yields up.
The dollar was holding at 155.87 yen on Monday, while the euro was flat at $1.0777 having faced resistance around $1.0791 last week.
Gold eased 0.5% to $2,347 an ounce, having gained 2.5% last week on demand from momentum funds and talk of ongoing buying by China.
Oil prices held mostly steady, with Brent crude futures up 0.1% at $82.87 a barrel, while U.S. crude was up 0.13% at $78.36.
($1 = 7.2339 Chinese yuan)