To The Moon

Thanks to Tiger for awarding the weekly top predictions for SPY back to back once again. Let’s get ready for the most crucial CPI data report follow by Fed’s decision to hike or pause interest rate next Tuesday and Wednesday respectively 💪

Economic data during the week gave some strength to the Fed pause narrative. The Institute for Supply Management's gauge of U.S. services activity nearly showed a stagnation for May, while factory orders for April rose less than expected. Moreover, initial jobless claims surged to their highest level since October 2021. The data pointed towards signs of cooling in the economy while also suggesting that cracks had begun to show in the highly resilient labor market. 

The benchmark index closed up 0.6% to 4,294 on Thursday, vaulting it back into bull territory with a 20% advance from its October low. The rally has been powered, in large part, because of a handful of companies posting outsized gains, like Big Tech, Tesla (TSLA) and AI darling Nvidia (NVDA). There has also been somewhat of a resurgence in economic optimism, compared to the sentiment that plagued the market in 2022.

It took weeks for the Bulls to finally make a run above 4,200, but it may only prove to be nothing more than a trap," writes Mott Capital Management, cautioning that the stock market has "made a big mistake." Investing Group Leader Lawrence Fuller counters by saying that while the "bull market has been led by the largest technology names so far, the breadth is starting to improve." 

The S&P 500 had been in bear market territory for a total of 248 trading days, which is the longest run since the cycle that finished on May 15, 1948 (which lasted 484 days).

Hold above 430 for calls & puts below 428.78 

The Bureau of Labor Statistics will reveal the much-awaited consumer price index (CPI) inflation report on Tuesday, June 13, coinciding precisely with the kickoff of the Federal Open Market Committee’s two-day rate-setting meeting. The convergence of all the essential economic elements sets the stage for market fireworks next week.

Economists’ expectations for the May CPI report are optimistic, with the consensus pointing to a continued slowing in consumer price pressures.

The headline annual inflation rate is expected to fall significantly from 4.9% in April to 4.1% in May, according to forecasts. If the expectations are correct, it will be the lowest inflation reading since March 2021.

On a monthly basis, headline inflation is predicted to advance by a modest 0.2% from April, signaling a sharp deceleration from the previous 0.4% rise.

As for the core annual inflation rate, which excludes energy and food components from the CPI basket, a decline from 5.5% in April to 5.3% in May is anticipated. Should this consensus view materialize, it would mark the lowest core inflation rate since November 2021.

On a monthly basis, core inflation is predicted to advance by only 0.4% from April, maintaining the trend observed so far in 2023.

US Inflation Rate vs Core Inflation Rate

Investors widely expect the Fed to pause its rate-hike campaign in June, assigning a 73% probability to this scenario, according to the latest CME Group FedWatch tool. Rising expectations on a Fed rate pause have been one of the key factors driving the S&P 500 Index, tracked by the SPDR S&P 500 ETF Trust (NYSE:SPY), to cross the bull market threshold in June.

The central bank has been in a blackout period this week ahead of the FOMC meeting scheduled for June 13-14. Surprise hikes by the Australian and Canadian central banks have led to some slight revisions, but there is still a 77% probability the Fed will hold rates next week, according to the CME FedWatch Tool. Rate increases might resume again in July, though there is an overall feeling that the FOMC is near the end of its hiking agenda.

But the Federal Reserve’s decision to hold off on rate hikes in June, in line with market expectations, necessitates a restrained or inline inflation reading. Yet, a lingering concern arises: what if inflation defies expectations and surprises to the upside?

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