Why the Nasdaq appears set to outperform on an inline CPI print

The wait for US CPI data is almost over. If anything the events over the past 24 hours have intensified the anticipation of a “hot” print this evening, as surging PPI figures in China yesterday were followed up by inflation upside surprises in Mexico and Brazil.

Uptrend 2

For the record, the expectation is for core US CPI to increase by 0.4% m/m in May after a +0.9% increase in April. This would lift the year-over-year rate for core CPI from 3.0%, to 3.5%.

Headline CPI inflation is expected to rise by 0.4% m/m in May, compared to +0.8% in April. This would lift the year-over-year rate from 4.2% to 4.7%.

Headline CPI is expected to peak in June, but to remain elevated in the following months, as the economy works through the transitory inflationary pressures related to the reopening.

If core CPI was to exceed consensus expectations tonight by a significant margin and by that, I think 0.8% or higher, US yields will move higher as will the US dollar, as markets reprice forward expectations for Fed policy to adjust.

In contrast, the base case of an inline or slightly higher print (0.4% to 0.6%) is unlikely to have a lasting market impact, as the focus turns to next week’s FOMC meeting, followed by payrolls data for June.

Catching the eye this morning, the S&P500 ending fractionally lower on the day while the tech-heavy index, the Nasdaq finished the day slightly higher against a backdrop of lower US 10 year yields.

Lower yields are supportive of tech stocks and the Nasdaq, ahead of the value-rich S&P500 index whose members benefit from higher yields.

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After a strong run higher during 2020 the Nasdaq has underperformed the S&P500 by over 9% since early February 2021, as viewed on the chart below.

An inline US inflation number tonight that doesn’t ruffle the feathers of the bond market, would set the scene for a period of Nasdaq outperformance that helps the ratio retest and break the February 3.50 high.

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Source Tradingview. The figures stated areas of the 10th of June 2021. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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