Stocks inch closer to all-time highs during week focused on inflation

On Monday, the global stock market is approaching its all-time high with the potential for inflation data to influence predictions of earlier interest rate reductions in the United States. Additionally, the release of Chinese activity data will challenge the confidence in a continuous economic recovery for the second largest economy in the world.

The focus will be on U.S. inflation data, but the impact of Chinese retail sales and industrial output reports on investor sentiment should not be underestimated.

On Monday, China's finance ministry announced that it will begin the highly-anticipated sale of 1 trillion yuan ($140 billion) in bonds with longer maturity dates in order to support domestic stimulus expenditures.

Chinese blue chips saw a rise to a seven-month high due to improved sentiment, leading to a positive impact on European markets. The STOXX 600 (.STOXX) remained close to its record highs, while U.S. stock futures showed an increase of 0.2-0.3%.

According to Pepperstone strategist Chris Weston, U.S. equity traders, as well as traders of bonds, gold, and the dollar, will be focused on adjusting their positions before the release of U.S. PPI, CPI, and retail sales data at the beginning of the week. This will be a common practice for all traders.

U.S. equity traders, along with bond, gold, and dollar traders (well, everyone really), will be looking to start the week by massaging exposures ahead of U.S. PPI, and CPI and retail sales

Chris Weston

On Monday, the MSCI All-World index (.MIWD00000PUS) saw a slight increase and is currently less than 0.5% away from its previous peak in March. The potential outcome of the upcoming U.S. April inflation report holds significance on a global scale.

This report will determine whether there will be a decrease in inflation after three consecutive months of unexpected increases. According to experts, the projected median increase for core consumer prices in April is 0.3%, lower than the previous month's 0.4% rise, which would result in a decrease in the annual rate to 3.6%.

The data is extremely important, to the extent that even rounding to the second decimal point could have a significant impact.

As per analysts at TD Securities, our forecast for the unrounded core CPI to be at 0.27% m/m indicates a higher possibility of a dovish surprise compared to a rounded 0.2% increase.

The possibility of a decrease in interest rates by the Federal Reserve in July may increase if the number is low, as the current probability is only 25%. Conversely, a higher inflation rate could delay a rate cut until after September and could challenge the prediction of a 42 basis point decrease in rates for the rest of the year.

Upcoming data includes statistics on U.S. producer prices, retail sales, and jobless claims, as well as final updates on European inflation that are likely to confirm predictions of a June interest rate reduction by the European Central Bank.

This week, there will be multiple Fed speakers providing updates on their thoughts to the market. Among them is Fed Chair Jerome Powell, who will be joined by the leader of the Dutch central bank on Tuesday.

Encouraging earnings from the US

As 80% of the S&P 500 has already published their results, it appears that companies are set to see a 7.8% rise in earnings, surpassing the predicted 5.1% increase from April.

According to LSEG data, quarterly earnings from the "Magnificent Seven" companies are expected to increase by 49% once Nvidia (NVDA.O) releases its quarterly report on May 22nd. This week, businesses such as Walmart (WMT.N), opens new tab, Home Depot (HD.N), opens new tab, and Cisco (CSCO.O), opens new tab, will be announcing their earnings.

In recent weeks, there has been a surge in global share indices reaching new peaks. However, this increase has occurred despite markets scaling back their more daring predictions for interest rate reductions in the current year.

Bruce Kasman, the head of economic research at JPMorgan, said that the clear interpretation of the financial market's performance is that the global economy is exhibiting stronger underlying strength than expected, and the rise in interest rates is a reflection of this growth rather than a hindrance to it.

We lean in this direction as our 2024 growth and policy rate forecasts both move higher.

Bruce Kasman

The dollar remains supported by the relatively strong performance of the U.S. economy, with the 160 yen barrier being the only thing preventing it from being retested due to the potential intervention by Japan.

On Monday, the Bank of Japan made a bullish announcement to the markets by reducing the volume of Japanese government bonds it planned to purchase during a routine procedure, resulting in an increase in yields.

The yen-dollar exchange rate stood at 155.87, while the euro saw a slight increase of 0.1% to $1.0785 after encountering hindrance around $1.0791 in the previous week.

The price of gold decreased by 0.8% to reach $2,340 per ounce. This comes after a 2.5% increase last week, attributed to the demand from momentum funds and speculation of continued purchasing by China.

The price of oil increased, as Brent crude futures saw a 0.5% surge to $83.18 per barrel, while U.S. crude also saw a 0.6% rise to $78.72.