Fed, dead ahead: Inflation expected to cool, FOMC seen holding pat

FED, DEAD AHEAD: INFLATION EXPECTED TO COOL, FOMC SEEN HOLDING PAT (1230 EDT/1630 GMT)

As the wildfire smoke clears from the eastern seaboard on a languid Friday, with few market catalysts in the way of economic data or earnings, market participants are girding their loins for next week's one-two punch:

CPI and the Fed.

On Tuesday, before Powell & Co sit down for their two-day policy palaver, the Labor Department will unleash its hotly anticipated Consumer Price Index (CPI).

Economists polled by Reuters expect CPI decelerated last month to 0.2% on a monthly basis (halving April's 0.4% print) and shedding 0.8% year-on-year to 4.1%.

Stripping out volatile food and energy prices, "core" CPI is seen repeating March's 0.4% monthly move, and easing by 30 basis points to 5.2% on an annual basis.

If the report sticks the landing or is cooler than expected, markets will likely rejoice and the Fed will probably press the rate hike "pause" button, as expected.

At last glance, financial markets have priced in a 72% chance of that very thing, according to CME's FedWatch tool.

But if CPI is hotter than expected, the Fed gang have two days to stew about it, and could very well toss another rate hike atop the pile come Wednesday.

After all, the Fed governors keep stressing how agile and data-responsive they are.

Regardless, it's a safe bet that CPI will land well above the central bank's average annual 2% inflation target:

Should the central bank let the Fed funds target rate stand at 5.00% to 5.25%, the conversation will likely shift to the likely duration of this restrictive policy.

For that, investors will turn to the Fed's dot plot, which shows where the members of the Federal Open Markets Committee see its policy rate headed in the future.

Any downward dot move is likely to stoke some risk appetite.

Here's where the dots stood as of its last quarterly update in March:

Wednesday morning, the Labor Department unveils its Producer Prices index (PPI), which is seen dropping 80 basis points to 1.5% year-on-year, which would make it the first major inflation indicator (aside from volatile import prices) to dip below the Fed target, giving the FOMC's voting members something else to chew on before the Fed announces its decision and Powell steps up to the podium for the Q&A session.

"We expect the statement will be hawkishly adjusted to note the potential for further tightening at 'coming meetings,'" says a Deutsche Bank Fed preview note. "The dot plot is also likely to show that appropriate policy may require an additional hike to achieve a 'sufficiently restrictive' stance."

"At this point there is little downside from Powell delivering a hawkish message in the presser," Deutsche Bank adds.

(Stephen Culp)

*****

INDIVIDUAL INVESTOR BULLS CHARGE, BEARS COWER -AAII (1100 EDT/1500 GMT)

Optimism vaulted to a 19-month high in the latest American Association of Individual Investors (AAII) Sentiment Survey. With this, bearish sentiment plunged to a 19-month low, while neutral sentiment also fell.

AAII reported that Bullish sentiment, or expectations that stock prices will rise over the next six months, surged 15.5 percentage points to 44.5%. This puts optimism above its historical average of 37.5% for the first time since February 2023. Bullish sentiment was last higher on Nov. 11, 2021 (48.0%).

Of note, the Russell 2000 RUT posted its record high close on Nov. 8, 2021, and the Nasdaq Composite IXIC posted its record high close on Nov. 19, 2021.

Bearish sentiment, or expectations that stock prices will fall over the next six months, collapsed 12.5 percentage points to 24.3%. After a 15-week streak of above-average readings, bearish sentiment fell to its lowest level since Nov. 11, 2021 (24.0%).

Neutral sentiment, or expectations that stock prices will stay essentially unchanged over the next six months, declined 3.0 percentage points to 31.2%. Neutral sentiment is below the historical average of 31.5% for the fourth time out of the past 23 weeks.

With these changes, the bull-bear spread jumped to +20.2 percentage points from -7.8 percentage points last week. The bull-bear spread is at its highest level since Nov. 11, 2021 (24.0%).

In this week's special question, AAII asked its members what their perception is of the current condition of the housing market. Here are the responses:

Strong: 16.3%

Mixed: 55.2%

Weak: 22.9%

Not sure/No opinion: 5.2%

(Terence Gabriel)

*****

NASDAQ UP 1% EARLY, EXTENDS RECENT GAINS (1024 EDT/1424 GMT)

Major U.S. stock indexes are higher early on Friday, with the Nasdaq IXIC and technology-related shares extending the previous day's gains.

The Nasdaq is up 1%. The technology sector S5INFT and consumer discretionary S5COND indexes are also up more than 1% in morning trading.

Shares of Tesla TSLA are up more than 5%, adding to their recent strong run, and General Motors GM is s up more than 3% amid expectations that Tesla's electric-vehicle charging system would become an industry standard after GM joined cross-town rival Ford F in agreeing to use the Tesla Supercharger network.

Investors are also gearing up for next week's inflation data and Federal Reserve meeting, where the Fed could decide to keep its policy rate unchanged for the first time since March 2022.

Here is an early market snapshot:

(Caroline Valetkevitch)

*****

NO MORE LOVE FOR EUROPE, GREY SKIES TO LINGER -GS (1003 EDT/1403 GMT)

Flows into Europe tend to do best when economies are recovering fast from troughs, but there seems to be less scope of that, says Goldman Sachs (GS).

Following steep outflows from European equities last year thanks to the war in Ukraine, GS notes this year began with a short-lived shift back into Europe driven by declining energy prices and more optimism on domestic growth, supported by strong and sustained performances from sectors like luxury.

"But since mid-March we've seen outflows again; a contrast to the European bond market where we've seen investors return with more consistency through this year" - GS

GS also flagged concerns like the recent turmoil in the U.S. banking sector raising risk premium for European financials, and a soft batch of economic data out of China, to which Europe has maximum exposure.

Adding to troubles, GS notes markets have become concentrated in mega-cap firms exposed to AI, something Europe has minimal exposure to, further weighing on the continent's ability to attract investors.

For the UK specifically, equity outflows have continued to disappoint whereas bond flows have improved modestly.

Other than being plagued by the same issues as the rest of Europe, the analysts say that they are seeing relatively few IPOs, and that large cap companies continue to buy back shares, further adding to the pressure.

The result is a contraction in net equity supply worth about 2% of mega-cap per annum, bigger than that in the U.S.

(Shashwat Chauhan)

*****

S&P 500 INDEX: SIGNIFICANT STRIDES IN RETRACING ITS LOSSES (0900 EDT/1300 GMT)

After collapsing more than 25% from its January 2022 record close into its October 2022 closing low, the S&P 500 index SPX has made great progress in retracing its losses.

Indeed, on Thursday, the benchmark index ended at 4,293.93, or 20.04% above that October closing low.

In terms of recouping its losses, the SPX, with its 4,299.28 high this past Monday, has now retraced as much as 61% of the 2022 decline on an intraday basis.

With Thursday's close, the SPX is still down more than 10% from its January 2022 highs, and it is important to note that any market that retraces less than 100% of its prior swing is always considered counter-trend or a correction of the prior swing.

The index is nearing the next significant resistance in the form of the 61.8% Fibonacci retracement of the entire 2022 decline, at 4,311.69, and the August 2022 reaction high at 4,325.28:

This zone is only around 0.4%-0.7% above Thursday's close, so the index appears to be reaching another critical juncture.

In the event of a reversal, there is a weekly Gann Line now around 4,261, which descends to around 4,256 next week (Gann Lines are trend lines running at certain angles off significant highs and lows).

The next support is in the 4,203-4,155 area, which includes a number of previous highs since late-August of last year, the 100-week moving average, the 23.6% Fibonacci retracement of the March 2020-January 2022 advance, the 50% retracement of the January 2022-October 2022 decline, and the upper boundary of the weekly cloud.

Thus, if any weakness is going to prove to be just a modest pause in an ongoing recovery, traders don't want to see the index back below this zone.

In the event there is an explosive upside thrust next week, there will be a powerful weekly Gann Line intersection around 4,445. The 76.4%/78.6% Fibonacci retracements of the entire 2022 decline are in the 4,505-4,535 area.

(Terence Gabriel)

*****

FOR FRIDAY'S LIVE MARKETS POSTS PRIOR TO 0900 EDT/1300 GMT - CLICK HERE