The S&P 500 tests 5,300 resistance amid easing inflation trends

The S&P 500 has reached a critical juncture, testing the 5300 level amid recent inflation data releases. This movement comes as the Federal Reserve and market participants digest the latest economic indicators, sparking discussions on potential interest rate adjustments.

Recent inflation data showed a notable deceleration, with the core consumer price index (CPI) rising by 0.3% in April. This is a significant step down from previous months, marking the first slowdown in six months. Year-over-year, the core CPI increased by 3.4%, the slowest pace in three years, driven primarily by shelter and gasoline costs. Retail sales stagnated in April, reflecting high borrowing costs and cautious consumer spending.

Source: US Bureau of Labor Statistics

Market impact

The softer inflation data boosted market optimism, leading to a rally in US stocks. The S&P 500 rose 1.2% to close above 5300 points for the first time. Technology, real estate, and healthcare sectors led the gains, while consumer cyclicals lagged. The Nasdaq Composite also hit a record high, driven by strong performances in technology stocks.

The latest US CPI report has provided some relief to Federal Reserve officials, who have been under pressure to rein in price increases. The Fed's Chair, Jerome Powell, emphasized the need for patience, suggesting that interest rates might not be cut immediately. However, market participants are increasingly betting on a potential rate cut later in the year, with odds of a September cut rising to about 60%.

Kathy Jones, Chief Fixed-Income Strategist at Charles Schwab, commented, "It does open the door to a potential rate cut later in the year. It will take a few more readings indicating that inflation is coming down for the Fed to act.

Will PCE prices surprise?

This week’s upcoming personal consumption expenditures (PCE) price index, will be closely watched. The PCE is expected to reflect the recent CPI trends but may show a softer increase due to its different weighting.

Market experts, including economists and strategists, anticipate that continued moderation in inflation could lead to a more accommodative Fed policy. However, the persistence of high shelter costs remains a concern.

A sustained decline in inflation could boost consumer and business confidence, potentially leading to increased spending and investment. However, if inflation proves sticky, the Fed may have to maintain higher interest rates for longer, slowing economic growth.

2H 2024 inflation outlook

Key data to watch includes the next CPI and PCE reports, along with employment figures and Fed statements. These will provide further insights into the inflation trajectory and the Fed's policy stance.

If inflation continues to decline, the Fed may begin to cut rates, supporting further market gains. Conversely, if inflation remains stubbornly high, the Fed may be forced to keep rates elevated, potentially dampening market enthusiasm.

David Rosenberg, Chief Economist at Rosenberg Research, stated, "The latest inflation data is a positive step, but we need to see sustained improvement before the Fed changes course. Investors should brace for potential volatility as the market adjusts to new economic realities."

Technical analysis of S&P 500

Source: Deriv MT5

The S&P 500 has its 50-day and 200-day moving averages trailing well below the current price, indicating strong upward momentum. However, the index's recent surge from its early May low has hit a pause, stalling near last week's record high of 5,350 as Federal Reserve comments underscored ongoing concerns about inflation.

The next key support level is at the psychological 5200 mark, while resistance is observed at 5330. A break above 5350 could signal further gains, while a fall below 5200 might indicate a potential correction on the horizon.

In conclusion, the S&P 500's test of the 5330 level amidst easing inflation data presents a critical juncture for investors. Continued monitoring of economic indicators and Fed policies will be crucial in navigating the market's future trajectory.