US market rebound faces key inflation test

Strong inflation may bolster case for more aggressive monetary tightening

REUTERS June 05, 2022
Investors next week will be watching data on US inflation, due out on Thursday. photo: reuters


A rally that lifted US stocks from the brink of a bear market faces an important test next week, when consumer price data offers insight on how much more the Federal Reserve will need to do in its battle against the worst inflation in decades.

Despite a rocky week, the S&P 500 is still up over 5% from last month’s lows, which saw the benchmark index extend its decline to nearly 20% from its all-time high. The index was recently down about 14% from its January 3 record after losing 1% in the past week.

More upside could depend on whether investors believe policymakers are making progress against surging prices. Signs that inflation remains strong may bolster the case for even more aggressive monetary tightening, potentially spooking a market already battered by worries that a hawkish Fed could deal a serious blow to US growth.

“This market is likely to remain range-bound until we get a meaningful move lower in inflation,” said Edward Jones Senior Investment StrategistcMona Mahajan, which currently favors large-cap stocks over small-cap, given the ability for larger companies to absorb higher input and wage costs. “Clearly, the print next week is going to be key.”

The consumer price index (CPI) for the 12 months through April rose 8.3%, down from an 8.5% annual rate reported in the prior month, which was the largest year-on-year gain in 40 years.

Friday’s inflation report for May is one of the last key pieces of data before the Fed’s June 14-15 meeting, at which the central bank is widely expected to raise rates by another 50 basis points.

If inflation is “continuing to be a problem, the Fed may not have the option of coasting later this year,” said Kingsview Investment Management portfolio manager Paul Nolte.

Published in The Express Tribune, June 5th, 2022.

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