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2024.05.15 06:16
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Just wait for the US CPI on Wednesday to see the turning point in the global market! (20:30)

Currently, the market generally expects the US CPI in April to ease. Some analysts warn investors to be prepared for the possible calmness in the US stock market being disrupted. Many investors believe that if inflation slows down, the upside potential for US bonds will be greater than that of US stocks. Despite US stocks being close to historical records, the yield on the 10-year US Treasury bond remains significantly higher than the level below 4% at the beginning of the year. Furthermore, in terms of European stocks, the slowdown in US inflation will benefit the continued rebound of European stock bond yield-sensitive stocks

The upcoming US CPI data for April, which is due on Wednesday, is the focus of the market this week. Analysts believe that the CPI data on Wednesday is crucial for shaping the Fed's policy and the global financial market outlook, potentially leading to a turning point in the global market.

Expected Moderation in April CPI

Currently, the market generally expects a moderation in April CPI, with some prominent trading departments warning investors to prepare for a possible disruption in the stock market. Some analysts believe that whether the market can continue to rebound may depend on investors' attitude towards rate cuts after the CPI data is released.

Analysts at Morgan Stanley stated that the S&P 500 index is expected to fluctuate by 1% in either direction after the CPI data is released on Wednesday. The analysts said, "The key risk is overheating CPI data. However, the upcoming macro data creates two-way risks - unexpected strong growth driving inflation concerns on one hand, and weaker growth leading to recession or 'stagflation' concerns on the other."

Other analysts believe that considering further rate hikes have been ruled out, the stock market may be able to withstand higher inflation. Data in line with expectations should also be positive for the market, at least in the short term, removing obstacles to inflation.

Previously, analysts at Morgan Stanley and Standard Chartered believed that Wednesday's CPI data would be lower than expected.

Morgan Stanley's Chief Economist Seth Carpenter pointed out that housing inflation accounts for 40% of core CPI and 18% of core PCE, so regardless of how housing inflation moves, the entire CPI data may follow suit.

The bank believes that current rental data is very weak, with vacancy rates in multi-family apartments nearing historical highs despite a surge in immigration last year. Housing inflation has already signaled a downturn, and the US CPI on Wednesday is expected to be "significantly lower than expected." In addition, due to seasonal adjustment factors in the first quarter, inflation data was higher than the actual situation, which will be corrected later.

Analysts at Standard Chartered Bank also stated earlier that housing inflation may soon decline, dragging down core inflation.

Return of "Soft Landing Trades"

Many investors believe that if inflation slows down, the upside potential for US Treasuries will be greater than that for US stocks. Despite the stock market nearing historical records, the yield on the 10-year US Treasury remains well above the level below 4% at the beginning of the year.

In recent months, persistent inflation issues have been troubling investors. Traders had bet at the beginning of 2024 that rates could be cut up to six times, but they had to quickly reduce these bets due to CPI consistently exceeding expectations. This shook the stock market in April and pushed bond yields to their highest level since November.

Many investors feel relieved by the April employment report, as a cooler labor market should eventually lead to more moderate price growth. Now, only actual inflation data is needed to support this.

Gennadiy Goldberg, Head of US Rate Strategy at TD Securities, stated, "The CPI report could significantly advance the argument for imminent rate cuts." Analysis suggests that there is a close connection between stocks and bonds. The yield of government bonds is largely influenced by investors' expectations of short-term interest rates set by the Federal Reserve. In turn, stock prices are partially influenced by investors' assessment of the risk-free return they can obtain from holding U.S. bonds until maturity.

The Dow has risen by 4.3% this month, just 1% below the record high set at the end of March. The rise in bond prices has caused the yield on the 10-year U.S. Treasury bond to decrease from 4.7% at the end of April to 4.479%.

Due to the magnitude of the interest rate increase exceeding investors' expectations and lasting longer than expected, bond returns have been disappointing in recent years. Nevertheless, whenever there are signs of inflation easing, investors quickly buy bonds, eager to lock in a yield of 4%-5% before the Fed starts cutting rates.

Ed Perks, Chief Investment Officer of Franklin Income Investors, stated that if data shows a slowdown in inflation, he expects the yield on short-term U.S. bonds to decrease by 0.2 to 0.25 percentage points, and the yield on long-term U.S. bonds to decrease by 0.1 to 0.2 percentage points.

Meanwhile, he said, "Given the current stock valuations, it is difficult for stocks to rise significantly." Therefore, he added that if inflation exceeds expectations again, stocks may have more room to fall.

George Mateyo, Chief Investment Officer of Key Private Bank, stated that owning unconventional assets such as real estate, inflation-protected bonds, or international stocks to hedge against a resurgence of high inflation is still wise, as bad reports could hurt both the U.S. stock and bond markets.

He said, "We believe inflation will be somewhat stubborn."

European stock markets are also at a turning point

Morgan Stanley recently released a research report stating that the European stock market's "Santa Claus" rally dominated by bond yield-sensitive stocks since the end of 2023 has returned, and this week's U.S. CPI data will be a key catalyst determining the success or failure of this trade.

The report believes that several historical prerequisites for the performance recovery of bond yield-sensitive stocks have been met: first, the soaring of the stock-bond yield correlation to historical highs, coupled with bottoming out/recovery of earnings revisions, improvement in macro indicators, oversold technicals, and a significant repricing of Fed rate cut expectations. In addition, some of the most bond yield-sensitive parts of the market, such as the credit spread in real estate, have significantly narrowed, which is a good leading indicator for stock performance.

However, the most important prerequisite for the continued rebound of this type of stocks is still the moderation of U.S. inflation data. The report states that preliminary signs have been seen, with recent lower-than-expected non-farm payroll data and an increase in initial jobless claims last week contributing to the initial recovery of European stock bond yield-sensitive stocks Nevertheless, Wednesday's US CPI data will be a key catalyst. Morgan Stanley expects that the month-on-month growth of core CPI in April will slow to 0.29% (compared to 0.36% last time, with an expectation of 0.3%). Data that meets or falls below expectations will drive the continued rebound of European stock bond yield-sensitive stocks