Equities report: US CPI rates send mixed signals

Over the past week, major US stock market indexes moved lower. Today we have a look at the release of the US CPI rates during the American session, whilst also discussing the recent announcement of export restrictions from the US to China. For a rounder view, we are to conclude the report with a technical analysis of S&P 500’s daily chart. 

US CPI rates showcase a mixed picture

The US CPI rates for December were released in the past hour or so. Economists were predicting the CPI rate on a year-on-year basis for the month of December, to come in at 2.9% which would mark an acceleration of inflationary pressures in the US economy, when compared to last month’s rate of 2.7%. The headline CPI rate came in as expected at 2.9%, yet of interest may be the Core CPI rate on a yoy basis for December, which came in lower than expected at 3.2% versus 3.3%. The releases tended to provide a mixed picture for the inflation narrative in the US economy. So let us dissect the financial releases, starting with the headline CPI rate. The confirmed acceleration of the headline CPI rate may provide the Fed with leeway to keep interest rates steady for a prolonged period of time, which may have aided the greenback whilst weighing on US Equities. However, the lower-than-expected Core CPI rate may have taken the spotlight, as it may imply that the Fed could cut rates earlier than expected as seen by the Fed Funds Futures which currently implies a 40.6% for a rate cut in June, rather than September. Thus, the expectations of an earlier rate cut by the Fed could aid the US Equities markets. In our view, the lower-than-expected Core CPI rate appears to have been well received, yet we do maintain some concern, as the CPI rates are still not at the Fed’s 2% inflation target.

US announces chip export controls to China

The US announced earlier on this week, that it would be announcing export controls on chips used for artificial intelligence, in an attempt to curb China’s chip development progress. The export controls are perceived as an attempt to increase the difficulty for China and other adversaries to acquire advanced technology that may be used in military applications. The policy would create a three-tier licensing system for chips that are used for data centers and AI computations, with the most restrictive tier also including nations such as China, Iran, Russia and North Korea according to the FT. Such export restrictions may hinder sales from tech giants such as Nvidia, Intel and AMD to China, which is a significant market for these companies. In turn, the reduced availability to export their products could decrease their future revenue and thus could impact their earnings in the long run. Furthermore, the possibility of the aforementioned scenario could weigh on the aforementioned stock prices of those companies for the aforementioned reason. Moreover, given NVIDIA’s significance and heavyweight status in the NASDAQ 100, it could also negatively impact the price of the index as well. In conclusion, should we see more measures stemming from the US Government either from the outgoing Biden administration or the incoming Trump administration in an attempt to curb chip exports to China, it could weigh on the US stock markets in addition to the respective stock prices of the aforementioned companies.

Technical analysis

US500 cash daily chart

Support: 5815 (S1), 5660 (S2), 5500 (S3).

Resistance: 5985 (R1), 6100 (R2), 6250 (R3).

The S&P500 appears to moving in a sideways fashion. We now opt for a neutral outlook for the index and supporting our case is the RSI indicator below our chart which has shot up from near 40 to close to 50, implying a neutral market sentiment. However, we would like to point out that our downwards moving trendline which was incepted on the 17th of December 2024 remains intact. Nonetheless, for our sideways bias we would require the index to remain confined between the sideways moving channel defined by the 5815 (S1) support level and the 5985 (R1) resistance line. On the flip side we would opt for a bullish outlook in the event of a clear break above the 5985 (R1) resistance line with the next possible target for the bulls being the 6100 (R2) resistance level. Lastly, for a bearish outlook we would require a clear break below the 5815 (S1) support line with the next possible target for the bears being the 5660 (S2) support level.