Weekly market outlook: S&P 500, gold, silver, WTI post CPI release
13:23, 14 April 2023
US stocks put on another strong performance on Thursday led by the tech sector, with the Nasdaq finishing the session up 1.8% and the S&P 500 and Dow Jones following suit adding 1.3% and 1.25 respectively.
Stock indices have been building bullish momentum for the past month as traders seemed to be relieved that the potential for a widespread banking crisis was narrowly avoided. Traders continue to believe the Federal Reserve is mistaken in thinking they can hold the terminal rate above 5% by year-end, with markets pricing in a rate of 4.1% in December, a full percentage below the central bank’s predictions.
The current range stands at 4.75% - 5% after the Fed delivered another 25bps hike at their March meeting. Markets had started to lean in favour of that being the last rate hike and therefore the terminal rate, but after last Friday’s jobs data the current pricing is showing a 70% chance of another 25bps hike in May. The fact is that the unemployment rate unexpectedly dipped once again and labour conditions remain tight, something that Powell had hoped would have shown further signs of loosening by now.
As expected, this caused a little bit of concern for equity traders and led to US stocks consolidating sideways for the beginning of this week, aided also by the reduced flows due to the Easter holiday.
But Wednesday brought most of the excitement this week with the March US CPI data release and the FOMC meeting minutes. The first gave a pleasant surprise as year-on-year inflation rose less than expected, coming in at 5% vs 5.2%, and dropping from 6% in February. The release gave a boost to equities and commodities and caused a bit of a tumble in US yields. That said, core inflation rose slightly from the previous month, which was already anticipated by markets, but nonetheless, it proves that domestic price pressures remain sticky, especially within the services sector. The feeling was further cemented by the fall in producer prices (PPI) released on Thursday, showing that price pressures have eased at the beginning of the production line.
The FOMC meeting minutes failed to reveal any new information, evidencing that some members had weighed stopping rate hikes at the March meeting after the banking rout, but still on track to continue tightening. In fact, Atlanta Fed President Raphael Bostic reiterated this morning that one more quarter-percentage-point interest rate hike can allow the Federal Reserve to end its tightening cycle with some confidence inflation will steadily return to the U.S. central bank's 2% target.
The recent rally in US indices does seem slightly overextended but the technicals are still supporting a path of least resistance higher. I wouldn’t be surprised if we see some consolidation over the coming days, with the potential even for a minor pullback, which would allow for a more healthy and sustained rally.
The S&P 500 has already started to show signs of a pause in the uptrend as the index has found resistance at 4,150 for the third session in a row. From here up until the 4,200 is where we saw a confluence of selling pressure back in February when it last attempted to break higher, and that led to a reversal back down to 3,800. We could see this pattern repeat itself although sellers would first need to break through support at 4,069 to consider the trend reversal to be unfolding.
S&P 500 daily chart
For commodities, gold and silver have shown remarkable strength over the last month, with silver outshining gold over the last few weeks. Fears over a potential recession, boosted by the banking drama at the beginning of March, have been keeping precious metals supported as they take advantage of their safe haven appeal.
But the lack of pullbacks, especially in silver, makes the recent rally slightly unsustainable and therefore, despite the potential for long-term appreciation, traders could be looking for a short-term reversal to consider a better entry point. So far there seems to be some resistance after the strong push higher this week, especially for silver which is likely to face increased selling pressure between 26.21 and 26.96, a key area of confluence which has caused price reversals in the past.
Silver (XAG/USD) daily chart
With regards to oil, US crude (WTI) seems to have worn out the bullish momentum seen at the open last week as OPEC+ announced a series of production cuts. The liquid gold did get a boost on Wednesday after the CPI release as it followed the general risk-on sentiment in the market but with rising levels of inventories renewing fears about a weaker demand outlook in the face of a global recession buyers have been struggling to find a reason to buy at current levels.
Moreover, WTI was facing key resistance between 80.65 and 82.54, an area that seemed to have been broken after Wednesday’s renewed bullish momentum. But the commodity iOS back trading within this range in Friday’s session, suggesting that there is still a lack of momentum to see a sustained break higher. This is also where the 200-day simple moving average is converging (82.68) which adds an extra layer of resistance for buyers. Given the recent moves, it looks like we may see further sideways consolidation along these lines next week as traders look for a fresh reason to break away.
US crude (WTI) daily chart