Macro Matters – Weekly review, w/c May 20

TradeDay Macro Matters

Macroeconomic / Geopolitical developments

• US and global equity averages surge to record levels after US inflation data

• Cooling CPI and Retail Sales miss

• Fed rate cut prospects raised

• Focus this week on Fed Minutes and Nvidia results

• What’s Ahead

US and global equity averages surge to record levels after US inflation data

US stocks soared to new heights, driven by trader optimism following the latest inflation data that suggested a potential easing of monetary policy. The S&P 500 gained 1.2% on Wednesday, surpassing 5,300 points for the first time, with technology, real estate, and healthcare sectors leading the charge. The tech-heavy Nasdaq Composite also hit a new peak, climbing 1.4% as Google parent Alphabet saw a 1.2% rise. Meanwhile, the Russell 2000 index of small-cap stocks increased by 1.1%, achieving its highest level since late March. This broad-based rally underscored the market’s positive response to the inflation data.

The encouraging inflation report revealed that the US Consumer Price Index (CPI) rose by 3.4% in April, slightly down from 3.5% in March and aligning with market forecasts. On a month-to-month basis, prices increased by 0.3% in April, down from 0.4% in March, while core inflation, which excludes volatile food and energy prices, also eased. This moderation in inflation heightened expectations that the Federal Reserve might consider cutting interest rates later in the year, further fueling the stock market rally.

Wall Street’s gains were mirrored in Europe and globally, where the FTSE 100 and the STOXX 600 extended their winning streaks. MSCI’s benchmark world stocks index, which tracks equities across 47 countries, climbed for the sixth consecutive day, reaching a new record high. Investors were also heartened by signs that China might implement measures to address its property market issues, adding to the bullish mood. This confluence of factors, including the tempered inflation data and the potential for easing monetary policies in major economies, sparked a global rally, pushing equity averages to unprecedented levels.

Cooling CPI and Retail Sales miss

Recent economic data have sparked renewed optimism that the Federal Reserve may begin cutting interest rates this fall, as inflation shows signs of easing and growth appears to be weakening. The Consumer Price Index (CPI) report for April, released on Wednesday, indicated a year-over-year increase of 3.4%, down slightly from March’s 3.5%. The monthly inflation rate also slowed to 0.3%, below expectations and a moderation from the previous month’s 0.4%. Core CPI, which excludes volatile food and energy prices, showed similar trends, with a year-over-year increase of 3.6%, down from 3.8% in March. These figures provided some relief for Federal Reserve officials, who are seeking confirmation that inflation is moving towards their 2% target.

Simultaneously, April’s Retail Sales data signaled a slowdown in consumer spending, adding to the evidence of a cooling economy. Total Retail Sales were flat compared to March, missing the expected 0.4% increase, with the prior months’ figures also revised downward. This flat performance suggests that consumer demand might be waning. Additionally, control group Retail Sales, which exclude more volatile categories, declined by 0.3% in April following a robust March. This combination of cooling inflation and weaker Retail Sales strengthens the case for the Federal Reserve to consider interest rate cuts, potentially as early as September.

Fed rate cut prospects raised

Traders are increasingly confident that the U.S. Federal Reserve might begin cutting interest rates as early as September, following cooler-than-expected inflation data for April. The consumer price index (CPI) rose by 0.3% from March, slightly below the anticipated 0.4% increase, which has fueled speculation about imminent rate cuts. This softer inflation data propelled stocks to fresh record highs and increased the probability of a September rate cut to roughly 70%, according to the CME FedWatch Tool, a significant jump from earlier in the week.

Despite the growing optimism among traders, some analysts remain skeptical about the likelihood of near-term rate cuts. Some forecasters highlighted that core inflation indicators, such as the Personal Consumption Expenditures Price Index, remain relatively resilient, making it challenging for the Fed to achieve its 2% inflation target quickly. The latest inflation data, while providing some relief, may not be sufficient for the Fed to lower rates promptly. Additionally, the Commerce Department reported flat Retail Sales for April, contrary to the expected 0.4% increase, suggesting a slowdown in consumer spending. This mixed economic data indicates that while the possibility of a September rate cut has increased, substantial economic challenges remain.

Focus this week on Fed Minutes and Nvidia results

This week, all eyes are on two major events: the release of the Federal Reserve’s Minutes from their April 30-May 1 meeting and Nvidia’s fiscal first-quarter 2024 earnings report. The Fed Minutes, due on Wednesday, are expected to shed light on the considerations that could prompt future rate cuts. However, since the meeting occurred before the latest Consumer Price Index (CPI) data, the Minutes may reflect a more hawkish stance based on earlier inflationary pressures. Analysts have cautioned that the timing could create mixed signals, as the latest data suggests a cooling in inflation which might not align with the potentially more aggressive tone of the Minutes.

On addition, Nvidia (NASDAQ: NVDA), the global leader in artificial intelligence hardware, is set to release its eagerly anticipated earnings report after the market closes on May 22, 2024. Wall Street analysts predict Nvidia’s revenue will soar to $24.65 billion for Q1 FY2024, a dramatic increase from $7.19 billion in the same quarter last year. The company’s net income is expected to leap to $12.87 billion, with earnings per share (EPS) forecasted at $5.17, up significantly from $0.82 a year ago. Nvidia has consistently surpassed earnings expectations, driven by surging demand for AI-related products. The Data Center segment, in particular, has shown rapid growth, with revenue reaching a record $18.4 billion in Q4 FY2024. Investors are keen to see if Nvidia can continue its impressive performance and push its stock price to new heights, potentially reaching a four-digit price tag for the first time.

What’s Ahead

Central Bank Watch: Central bank focus will be on the PBoC interest rate decision Monday, the RBA Meeting Minutes Tuesday and the RBNZ interest rate decision Tuesday. But the main spotlight will be on the FOMC Meeting Minutes Wednesday, as well as Fed speakers through the week.

Macro Data Watch: The main macro data releases this week are inflation data from Canada and the UK, but with a critical global focus on the flash PMI data on Thursday.

Date: Major Macro Data

05/20/2024: PBoC Interest Rate Decision

05/21/2024: RBA Meeting Minutes; German PPI; Canadian CPI

05/22/2024: RBNZ Interest Rate Decision; UK inflation report (incl. CPI); FOMC Meeting Minutes

05/23/2024: Global Flash Composite, Services, Manufacturing PMI; EU Consumer confidence report

05/24/2024: Japanese CPI; German GDP; UK Retail Sales; Canadian Retail Sales; US Durable Goods Orders

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