US CPI preview: S&P 500, Nasdaq, Dow Jones, DAX 40, FTSE 100 levels to watch
11:12, 12 January 2023
It’s CPI day and there is no denying the hype that has been built up around this event. As important as the data point is, it is usually just another reading that tells you about the state of the economy, but not necessarily a market-moving event in itself. But things have changed and in this post-covid Fed-tightening environment the CPI data has given markets a lot to think about - and act on- so let’s take a look at what is expected from the data and how the equity market could react.
The November reading came in at 7.1% with a monthly growth of 0.1%. Consensus expectations show this figure falling to 6.5% in December with no growth from the previous month. If confirmed, this would be the same drop seen in the previous month in absolute terms, a 0.6pp drop from 7.7% to 7.1% in November. The core reading is also expected to drop from 6% to 5.7% but expectations show a possible increase in the monthly core reading to 0.3% from 0.2%.
As usual with economic data, the initial market reaction is not so much about what the actual reading is but how it fits within pre-established expectations that have been shaping momentum up until that point. Currently, heading into this December CPI release, there are very much high expectations that the reading will show another significant decline in price pressures and therefore allow the Fed to hike a smaller 25bps at the February meeting, to which markets are applying a probability of 75% compared to 25% for 50bps.
US equities - S&P 500, Nasdaq, Dow Jones
US equities have been trading with caution over the last few weeks despite the risk-on boost from China further relaxing its lockdown policies. But the boost to risk appetite on Friday post-NFP has seen all three major indices breaking higher back towards their levels pre-FOMC meeting in December. We can see from Wednesday’s candlestick that risk appetite is still very much strong but so far this morning we’ve seen a pause in the trend as traders wait to see what happens with the data.
The S&P 500 (US 500) has run into its 200-day SMA (3,969) which we know has been a strong area of resistance in the past. It also serves to asses risk appetite within the index as it has been shaping the way the S&P 500 has been moving since the April 2022 highs. Despite traders being positioned in advance for a downside surprise, there is still likely going to be a lot of built-up demand for US stocks which means the 200-day SMA should be cleared and buyers will face the next resistance at the descending trendline (4,003). We may see a break above this level but the key test is whether the index actually manages to close above it and build higher lows, rather than fizzling out the rally and then closing back below its resistance.
On the flip side, if we see a stronger-than-expected CPI reading then there is a greater potential for a move higher in bond yields, and a significant drop in stocks given there will be more uncertainty with regard to the Fed’s hiking path. This could see the S&P 500 back towards 3,800 before traders assess the longer-term impact of the actual figure reported. Also, so far the S&P 500 has failed to mark a new high versus where it was in December whilst the RSI has, which may signal some exhaustion in the short-term rally that has been unfolding.
The Nasdaq (US 100) has been faring quite well this week with a pickup in the tech sector and so it has broken back within its symmetrical triangle pattern. The recent move higher has seen the index back above its ascending trend line support from the October lows which had at one point acted as resistance throughout the end of the year. There is likely to be a little more resistance for the Nasdaq compared to the S&P and given it has more ground to cover before it gets to its 2022 descending trendline we may see some renewed resistance at that point (11,870). The 200-day SMA is also above this trendline so it reinforces the belief that it will be harder to break above it. On the downside, 11,200 still remains a good area of support but I would expect this area to be invalidated as selling momentum builds and therefore sideways consolidation around 10,880 is back on the table again. Similar to the S&P, the Nasdaq hasn’t managed to see a new 4-week high whilst the RSI has, so failure to break above 12,257 will signal exhaustion in the rally.
The Dow Jones (US 30) has been the standout US index in 2022 and is currently still trading above its 200-day SMA, which gives it an advantage heading into this CPI release. The index is also holding above its 2022 descending trendline and its 4 major m moving averages (20, 50, 100, 200) meaning buyers are less likely to find resistance along the way as it climbs back towards the December high at 34,941. That said, if the CPI comes in above expectations, it also has further room to cover on the downside back to its trendline, at which point there is likely to be renewed support as it is converging with its 200-day and 100-day SMAs (32,195).
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DXY, S&P, Nasdaq, Dow Jones daily charts. Photo: capital.com. Source: tradingviewEuropean equities - DAX 40, FTSE 100
The CPI data is likely to have a knock-on effect in Europe as it will determine sentiment heading into the end of the week. The DAX 40 (DE 40) has been on a clear path upward since the China reopening news has been fuelling risk sentiment and the index is now almost at a 12-month high. The most impressive thing is that it has easily broken past its key resistance range (14,813 - 15,000) within a single session and has managed to even close above it, essentially invalidating it. The next area to watch out for is the 15,200 level where we saw some consolidation back in February last year, but if we see another boost to risk appetite on the back of a weak CPI reading then I wouldn’t be surprised if this area is invalidated too. At some point though, traders will need a pause for breathy to assess the magnitude of the moves over the past 2 weeks and that is when we may see some corrective selling.
On the downside, I would expect the resistance range to step in once again if the CPI reading goes the other way, so we may see some strong selling around 14,813 and possibly back towards 14,400. Also, keep an eye out for the RSI to see if it manages to break above the November high and follow the momentum in price.
For the FTSE 100 (UK 100) we have a similar setup to the DAX 40 but in this case, the index is heading towards its all-time high just below 8,000 after having lagged during the post-covid recovery. The strong buying momentum is likely to continue but watch out for resistance around 7,793 as this is where we saw buyers being caught out back in 2018. From here there seems to be a pretty clear path towards 7,900. On the downside, a drop below 7,700 may be on the cards if momentum turns but I expect there to be some support around that area. Similar to the DAX, watch out for an RSI break above the November high to really consolidate the bullish rally.
DAX 40, FTSE 100 daily charts. Photo: capital.com. Source: tradingviewMarkets in this article
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