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How US500 Reacts Under the Pressure of Inflation

The price of the US500 declined on both Monday and Tuesday despite last week’s bullish price movement. Last week, the market contemplated whether the instrument would be able to maintain its bullish trend and so far we have had no major indication that it could.

Looking at today’s futures market we can see that the index is only very slightly higher (0.19%) and has not increased to yesterday’s price high. Traders are waiting for the stock market to open, to gauge investors’ reaction to the latest CPI report which is scheduled to be released 1 hour before the trading starts.

US500 - 13.07.2022.jpg

The reaction is likely to be massively influenced by the latest inflation figures for June 2022. The CPI figure is predicted to land at 1.1% which is slightly higher than the previous month. However, the outcome remains uncertain and most analysts believe that if the inflation figure exceeds 9.0%, this will trigger a more hawkish stance from the Central Bank. If the CPI figure is higher than predicted and inflation reaches 9% or higher, then the Federal Reserve will action an emergency increase in the fund rate by 100 basis points. At the moment, this is not priced into the US Dollar or the US stock market as traders believe that the Federal Reserve is more likely to raise interest rates by 75 basis points. A higher increase could potentially apply more pressure on the stock market, especially the high-tech sector, which traditionally depends on the cost of borrowing and consumers’ disposable income.

Another element influencing the decline, is the bond market, which has, once more, begun to actively turn towards growth. This points towards a “risk off” market sentiment. Yesterday's auctions for the placement of short-term securities saw the 3–month treasury bills placed at a rate of 2.110%, which exceeds the previous figure of 1.850%. The 3-year option was placed at a rate of 3.093%, which is also higher than expected. It appears that bonds are currently looking more appealing as the stock market struggles to gain momentum.

Among the stocks seeing the highest growth so far is Twitter - which has increased by 4.23% after a strong decline, Cboe Global Markets - which increased by 2.26%, and Martin Marietta Materials - which increased by 2.0%. With such low gains in the stock market, we can see why the bonds are looking a lot more enticing right now.

The US stock market is yet to open, but the traders will continue monitoring the performance once iytt does. The main driver is likely to be the latest inflation figures due to be released shortly, as well as the earnings for Morgan Stanley and JP Morgan due to be released tomorrow after market close.

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