Weekly Summary: Markets Unhappy Despite Inflation Slowdown

The U.S. Consumer Price Index (CPI) edged lower to 4.9% year-on-year, beating the expected 5.0%. The Producer Price Index (PPI) went even further down to 2.3% year-on-year from the previous 2.7%.

Supposedly, that should be more than enough to push stock indexes up, as slowing down inflation confirms a possible end of the Federal Reserve’s (Fed) monetary tightening cycle. But the S&P 500 broad market index is mostly unchanged, close to 4140 points. There are several reasons for this, including debt ceiling debates deadlock and the still evolving banking sector troubles.

The meeting of the U.S. President Joe Biden, who represents Democrats, with the House speaker Kevin MaCarthy from the Republican side, has been postponed until the beginning of next week. Some investors consider it as a deadlock in talks, while others see progress on the substitute level. Joe Biden is scheduled to attend the G7 meeting in Hiroshima (Japan) on May 19-21. So, he has very little time left to settle the debt ceiling issue with Republicans. Next week is likely to be decisive for the resolution.

PacWest Corp, that has been sending distress signals since last week, as it was seeking for a potential buyer, has reported it lost 9.5% of deposits amid the bank run last week. This it definitely too much for such a short period of time. PacWest Bancorp (PACW.O) stocks immediately plunged by 23% on the news, dragging the banking sector index down. Jamie Dimon, CEO of JPMorgan, called U.S. Securities and Exchange Commission (SEC) to probe the short-sellers of the banking stocks to restore confidence in the banking sector. The call came just after he said that regional banks are “quite strong.”

However, there is likely to be a drop in stock indexes not before, but after the formal deadline of a debt ceiling talks in early June. Meanwhile, stocks are likely to move sideways unless some serious troubles in U.S. large banks are revealed.

Technically, the S&P 500 index has an upside formation with targets at 4500-4600 points. The index failed to dive below the support level of 4050-4070, and recovered to the resistance at 4150-4170 points. The resistance has now moved to 4200-4220 points, and the support – to 4080-4100 points. We may expect the index to settle inside this range.

The recession scenario chances are rising in the oil market as Brent crude prices continue to tumble towards $40-60 per barrel, which is the recession target. Prices tested the resistance at $77.00-79.00 per barrel and are moving down to the $67.00-69.00 level per barrel. Once they breakthrough this level they may accelerate further down. However, this will largely depend of the efforts of the Organisation of the Petroleum Exporting Countries and its allies, known as OPEC+, to stabilise prices.

Gold prices are moving inside the mid-term upside formation with targets at $2000-2100 per troy ounce that have already been met. A fierce struggle for the important level of $1980-2000 per ounce resulted in the upside scenario with targets at $2070-2090. Prices were very close to $2062, but rolled back to the $2000 support level. Another testing of the resistance at $2070 is likely since prices are above the crucial support of $1980-2000 per ounce.

The monetary market situation is complicated. Short trades for EURUSD opened at 1.06700-1.07200 with a downside target at 5000 points below the opening level and the same 5000 points for a stop-loss order are intact. The decline of the EURUSD to 1.05000-1.05500 was used to close half of the trade. The other half should be closed at 1.05000-1.06000 considering recent developments.