On Wall Street, there has always been the slang of "sell in May, and then leave", which is believed by many insiders. Historically, the period of the worst performance of American stocks every year is from May to October, and this period is also the six months when the yield of American bonds is relatively strong throughout the year. The relatively high yield of treasury bond bonds often suppresses the valuation of American stocks, thus intensifying the "May selling effect".
At the beginning of May this year, although the overall performance of the US stock market was quite strong - the S&P 500 index has risen by about 3.7% so far this month, and US bond yields have also fallen overall. However, for the market, the real test may have just begun.
Looking back on the news events so far in the past year, few events can determine the direction of the US bond market better than the monthly CPI data, and the latest data released on Wednesday is probably no exception. At the same time, Federal Reserve Chairman Powell will also deliver a speech with several senior Federal Reserve officials, which is expected to affect the market's prediction of the next interest rate direction along with CPI data.
"When the Federal Reserve expresses dependence on data, every time data is released, it can become a significant event affecting the market," said Matthew Bartolini, Director of Americas Research at SPDR, a global consulting firm
Is CPI data a blessing or a curse?
Many industry insiders have stated that the US April CPI data released on Wednesday is expected to be the biggest test facing the market rebound starting this month. At that time, Federal Reserve Chairman Powell dispelled concerns about the possibility of the Fed raising interest rates again in his interest rate resolution at the beginning of the month.
However, since then, despite an unexpected surge in US initial application data, which once again reinforced signs of a slowdown in the labor market and further fueled expectations of a Fed rate cut, some Fed policymakers have continued to shout slogans of maintaining high interest rates for the long term. At the same time, data released last Friday showed that the initial value of US consumer confidence exceeded expectations and fell sharply, and the unexpected rebound in inflation expectations for the next year continued to raise concerns in the market about the US falling into stagflation.
These latest data developments have added to the risks inherent in the upcoming inflation data this week - a welcome decline in CPI data is expected to support the rebound in the stock and bond markets so far this month. However, if CPI continues to exceed expectations, it is bound to exacerbate industry anxiety about the risk of secondary inflation and even stagflation.
Bank of America strategists have stated that the market is expected to be in a "waiting mode" before this week's CPI.
Bartolini from State Street Global also pointed out that "investors are trying to interpret the situation. This inflation report will become a mini super bowl for policy observers."
Currently, a more concerning phenomenon is that the CPI reports released earlier this year have almost all contributed to the sell-off in the bond market, as higher than expected data has raised concerns about the Federal Reserve's efforts to combat inflation being hindered.
The latest CPI release date was April 10, when the yield of 10-year US treasury bond bonds soared by 18 basis points in just one day, which was the largest one-day fluctuation caused by CPI data since 2002. In summary, half of the cumulative increase in 10-year US Treasury yields exceeding 60 basis points this year occurred on the day of the CPI release.
Jonathan Cohn, head of strategy for the US interest rate department at Nomura Securities International, said, "The current reality in the market is that we often fluctuate between data. The US economy does seem to have some signs of weakness, but in reality, to sustain the current market rally, CPI data is needed to show that inflation has not re accelerated. What we have seen before is that the results of anti inflation are disappearing."
Of course, based solely on the current economists' prior expectations for the CPI data, people seem to be more optimistic that US inflation will cool down after three consecutive months of rebound. The median estimated by media surveys shows that the annual growth rate of the US CPI in April is expected to decline from 3.5% the previous month to 3.4%, while the month on month growth rate will remain at 0.4%. In addition, the slowdown in core CPI growth may be more pronounced: the year-on-year increase in core CPI is expected to decrease from 3.8% to 3.6%, and the month on month increase is expected to decrease from 0.4% to 0.3%.
Paul Ashworth, Chief North American Economist at Capital Economics, also stated that the fundamentals "still indicate that inflation will weaken.". He said, "We still expect inflation to ease again later this year. The shortened delivery times from suppliers are consistent with the recovery of anti inflation trends in core commodities, while the combination of slower wage growth and faster productivity growth is consistent with a decrease in non housing service inflation."
Industry insiders suggest that given the recent market rebound, traders may see any signs of renewed progress in the anti inflation situation as a signal to continue buying. Deutsche Bank Chief US Economist Matthew Luzzetti predicts that the Federal Reserve will not cut interest rates for the first time until December. However, considering the current momentum, investors are certainly more inclined towards the dovish sentiment.
Powell and other high-ranking Federal Reserve officials took turns appearing
Of course, this week, in addition to the crucial CPI data, Federal Reserve officials will also continue to stage a "wheel race" of speeches. Among them, Federal Reserve Chairman Powell is scheduled to deliver a speech at a foreign banker event in Amsterdam on Tuesday, which is expected to be the most anticipated by investors.
The following is the schedule of speeches by Federal Reserve officials this week (all in Beijing time)
On Monday at 21:00, the FOMC Voting Committee, Cleveland Fed Chairman Mester, and Federal Reserve Director Jefferson delivered speeches on central bank communication;
On Tuesday at 22:00, Federal Reserve Chairman Powell and European Central Bank Governor Norte jointly attended the event and delivered speeches;
On Thursday at 0:00, Minneapolis Fed Chairman Kashkali attended a fireside conversation;
On Thursday at 22:30, Philadelphia Fed Chairman Huck delivered a speech;
On Friday 0:00, 2024 FOMC voting committee member and Cleveland Fed Chairman Mester delivered a speech on the economic outlook;
On Friday 3:50, 2024 FOMC Voting Committee and Atlanta Fed Chairman Bostic delivered a speech on the economic outlook.
Based on the latest statements from Federal Reserve officials last week, most of them remain cautious on interest rate issues, and the relevant tone still indicates that the conditions for current interest rate cuts are not yet mature. Many local Fed chairpersons have emphasized their caution towards inflation and patience in policy decisions in their speeches, especially the two hawkish representatives - Minneapolis Fed Chairman Kashkali and Federal Reserve Director Bauman - who even believe that interest rates will not be cut this year.
Federal Reserve Director Bowman said last Friday that she does not expect to cut interest rates this year given the direction of inflation. Kashkari does not rule out the possibility of the Federal Reserve raising interest rates again if inflation stagnates around 3%.
On the side of dovish officials, Gullsby, who made dovish remarks earlier this year, also made it clear last Friday that the rising inflation in the first three months of this year is changing his previous view that inflation is clearly on the path to 2%. The strong consumer spending and employment growth have made him doubt whether the economy is tilting towards overheating, and whether this situation is long-term or short-lived.
However, Gullsby still emphasized, "In my opinion, there is not much evidence to suggest that inflation will stagnate at the 3% level. We have encountered turbulence, and now I think we need to wait."