S&P 500; US Indexes Fundamental Weekly Forecast – Weak CPI Data Will Be Bullish for Stocks

The major U.S. stock indexes posted solid gains last week, primarily driven by President Trump’s proclamation that steel and aluminum tariffs would exclude imports from Canada, Mexico and Australia, and a robust U.S. Non-Farm Payrolls report.

In the cash market, the benchmark S&P 500 Index settled at 2786.57, up 3.5%. The blue chip Dow Jones Industrial Average finished the week at 25335.74, up 3.3% and the tech-driven NASDAQ Composite closed the week at 7555.81, up 4.2%.

The U.S. Bureau of Labor Statistics reported the economy added 313,000 jobs in February, well-above the 200,000 estimate. The unemployment rate was unchanged at 4.1%. Traders were looking for a drop to 4.0%. Average hourly earnings remained a concern, coming in at 0.1%, below the 0.2% forecast. Essentially, wages grew less than expected, rising 2.6 percent on an annualized basis.

Stocks were also driven higher on the news that President Trump was prepared to meet North Korea’s Kim Jong Un sometime before May in what would be the first face-to face encounter between the countries’ leaders and could mark a breakthrough in a stand-off over the North’s nuclear weapons.

Forecast

Last week, the NASDAQ Composite reached a new all-time high, clawing back and then exceeding all of the correction from early February. The S&P 500 Index and Dow Jones Industrial Average also posted strong gains. They have now recovered more than 62% of the February correction.

Despite the strong recoveries in the major indexes we continue to expect to see elevated volatility levels, driven by the possibility of a trade war, interest rate uncertainty and inflation concerns.

 

Stock market investors will be focused on U.S. Consumer Inflation this week because it will likely influence next week’s Federal Open Market Committee Economic projections. Traders are looking for CPI to come in at 0.2%, down from the previously reported 0.5%. Core CPI is also expected to come in at 0.2%, down slightly from 0.3%.

U.S. Producer Inflation is expected to rise slightly by 0.1%, down from the previously reported 0.4%.

U.S. Retail Sales are expected to make a recovery from last month’s disappointing -0.3% performance with a reading of 0.3%.

Finally, Building Permits are expected to come in at 1.33M, down from 1.38M. Rising mortgage rates may weigh on this report.

With Average Hourly Earnings coming in lower than expected in last week’s Non-Farm Payrolls report for February, traders will be glued to the CPI number. A weak performance will likely mean the Fed will only raise rates a total of three times in 2018, instead of the four that some traders have been counting on.

A CPI miss will likely drive the U.S. Dollar lower which should underpin stock prices. Stronger than expected CPI data could limit the market’s gains. Prices could break sharply if the inflation data is strong enough to warrant as many as four rate hikes this year.