US inflation falls but recession risks weigh on US stocks

Fears of a US recession weigh on Wall Street

• US CPI falls: Headline CPI continues to track lower
• Fed minutes warn of recession: The US banking crisis could drag the US economy into recession later in 2023. 
• USD is steady today: Sharp weakness for the USD on major forex after the CPI data has been tempered.
• Equities turn lower: After a sharp decline into the close on Wall Street, European indices look cautious today. US futures have rebounded slightly.
• Metals and oil are mixed: In commodities, gold and silver are trading mixed, with oil slightly lower.

US CPI falls again

The decline in US inflation continues.

US CPI fell more than expected yesterday, with headline CPI dropping back to 5.0%. This was lower than the consensus of analyst forecasts which was looking for 5.2%.

Market reaction was an instant selling of the USD and also to buy equities. After all, inflation is falling, right?

Well, yes, inflation is falling on the headline basis of CPI, however, US Core CPI remains sticky and ticked mildly higher to 5.6%. 

This suggests there is more work needed to be done by the Fed.

FOMC minutes weigh on equities

Furthermore, the market moves have proven to be short-lived, due to another factor.

The minutes of the March meeting of the FOMC (announced a few hours after US CPI), suggested that there was still likely to be another hike to interest rates on the way in May.

Additionally, there has been an impact assessment by Fed staff of the US banking crisis. 

According to the minutes:

“Given their assessment of the potential economic effects of the recent banking-sector developments, the staff’s projection at the time of the March meeting included a mild recession starting later this year, with a recovery over the subsequent two years.”

This has caused a reversal of a rally in equities, with reversal signals seen on US markets.

US PPI will be eyed today

Markets will also be keeping an eye on another gauge of US inflation that is announced today.

The US PPI (factory gate inflation) has been leading headline CPI lower for more than a year now. 

Analysts expect US Core PPI to drop sharply to 3.4% (from 4.4% in February).

Markets will likely trade off any surprises, with any signs of inflation being sticky helping to cement expectations of a hike by the Fed in May.

US equity markets post warning signals

In yesterday’s report, we warned of US markets being at a key crossroads. This is even more acute after yesterday’s pullbacks.

Both S&P 500 futures and NASDAQ 100 futures posted bearish engulfing candlestick patterns on their daily charts.

S&P 500 futures (SP500ft)

The futures initially rallied to an eight-week high of 4177 after the US CPI but then reversed sharply lower to close below the previous session low.

This is a bearish engulfing candle (and also a bearish key one-day reversal).

This is a powerful near term signal.

The move has also broken the support of the four-week uptrend. 

However, selling pressure is contained, for now:

• The market has ticked back higher overnight, suggesting there is still an appetite to support weakness.
• Also, the daily RSI is holding up well around 60.

For now, this is a warning, but it could turn into something more considerable.

Reaction to the overnight low at 4110 will be an initial signal, but if the market also posts a negative daily candle today, this would be confirmation of the reversal.

Support at 4096 would then be key near term.

NASDAQ 100 futures (NAS100ft)

The bearish outside day on the NASDAQ futures did not come at a key high, so its impact is slightly tempered.

However, the support band that we discussed yesterday at 12945/13080 is coming under considerable scrutiny.

Despite this, there has been a notable drop in the daily RSI, falling to a four-week low.

Along with yesterday’s price action, this is a warning.

A close below the initial support at 12925/12950 would open for a deeper correction back towards 12635.

Resistance is growing between 13240/13345.

Support and resistance levels for Forex, Commodities, and Futures/Indices 

Data: MT5/IXOne

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