The US February CPI data might be overshadowed by the ongoing banking rout but it will also distract investors from the current market fizz. The headline inflation is expected to further cool down to 6% from 6.4% in January, which may support the Fed to slow down rate hikes next week. However, the SVB and Signature Banks’ collapse rings a louder bell to the Fed, with analysts now seeing a pause or at least a slowdown in rate hikes from the March meeting. The upcoming inflation will be most likely to show a further slowdown in consumer price increases as the recent non-farm payroll data shows a pickup in the unemployment rate and a slowdown in wage growth.
US bond yields tumble
The US bond yields sharply retreated since SVB’s fallout rattled financial markets, with the Fed rate–sensitive bond, the 2-year yield plunged 100 basis points in the last three trading days, suggesting markets strongly project a pause in Fed’s rate hikes in the March meeting. A cooler CPI data will certainly further boost investors’ policy optimism and lift markets further. And of course, this is in the condition that there will not be a further contagious effect from SVB and Signature bank’s failure.Source: TradingView as of 14 March 2023 (Click to enlarge the chart)
Tech stocks are resilient amid the Fed bets
Another observation is that the tech stocks hold strong as investors expect the Fed to pivot sooner than previously projected amid the current banking stock rout. The tech-heavy index, Nasdaq, outperforms both Dow and S&P 500 since January this year. The below chart also illustrates that the index tends to continue to climb higher during the period when Fed hold the rate at its peak before a selloff when the Fed starts cutting rates.Source: TradingView as of 14 March 2023 (Click to enlarge the chart)
So, what stage is it for inflation, a rate hike cycle, and a stock market trajectory? The US inflation hit a peak of 9.1% in June 2022 and cools for 7 consecutive months to 6.4% in January this year, though the CPI was hotter than expected in January. Another cooldown in inflation will promote the Fed to further slow down its tightening steps. Plus, the US bank's failure may bring the Fed pivot forward or we can say that the central bank is very close to a pause in rate hikes. The last, the stock markets will probably have another ride of the policy pivot before a crisis-driven selloff.
A possible 10% volatility in the Nasdaq amid the US CPISource: CMC Markets NG as of 14 March 2023 (Click to enlarge the chart)
Nasdaq is being supported by the 200-day moving average at around 11,880, a further cool down in the US CPI may take the index to rebound and test the high in February around 13,000, or about a 10% rally if the Fed meets market expectations to pause rate hikes in March.
On the flip side, sticky CPI data may cause a further selloff and send the index lower to between 10,636 to 11,000.