Market Momentum Stalls as Inflation Worries Resurface

Market Momentum Stalls as Inflation Worries Resurface 

The stock market's forward momentum is slowing down, and the surge in commodity prices is reigniting concerns about inflation. Despite these developments, Wall Street strategists are holding onto their optimistic outlook for now.

HSBC's strategists, led by Max Kettner, believe that any setbacks are likely temporary, especially since the market is still anticipating rate cuts this year. JPMorgan's traders, led by Andrew Tyler, are cautiously optimistic as they approach the inflation data.

However, there are apprehensions looming ahead of the US CPI data, and some investors are wary of overextended valuations before the earnings season begins. Stock market momentum has stagnated, with prices remaining relatively unchanged for about a month. The spike in commodity prices is partly responsible, raising concerns about whether persistent inflation could challenge the rate outlook, especially following cautious remarks from several Fed officials.

JPMorgan views a cooler CPI print as favorable for risky assets, and current market positioning is supportive, with hedge funds having sold stocks for several weeks.

While acknowledging the challenges in slowing inflation, JPMorgan doesn't foresee it derailing the overall positive outlook, citing robust GDP growth, positive earnings, and a Federal Reserve on pause.

Recent market jitters have led to adjustments in positioning, with bullish exposure decreasing, according to Citi. Data indicates significant selling of long S&P 500 positions, reversing the previous week's flows.

Although inflation expectations have been rising, evidenced by increasing breakevens and swap rates, the market remains vigilant. Stock volatility and demand for hedges have risen, but crucial technical levels are holding steady.

Despite tightening financial conditions before the CPI release, they still favor equities at current levels due to ongoing global economic improvements and positive economic surprises from major regions.

Barclays strategists, including Matthew Joyce, emphasize that the equity market is more focused on the improving growth outlook than solely on inflation and interest rates. They anticipate any short-term turbulence to be overshadowed by favorable incoming data.