Weekly Summary: the S&P 500 at 5000, and January Inflation

The S&P 500 broad market index futures experienced a 0.9% rise, reaching 5000 points for the week, culminating in a new all-time high. The benchmark closed at 5000.40 points on Thursday, with the significance of reaching the round figure of 5000 being emphasized.

Corporate profits for Q4 2023 have exceeded Wall Street forecasts, with over 60% of S&P 500 corporations having delivered their reports. More than 80% of these reports have presented results above expectations, surpassing the average of 67%.

The Federal Reserve (Fed) is attempting to temper the positive sentiment in the market. While Chair Jerome Powell and Minneapolis Fed President Neel Kashkari adopted an extremely hawkish stance earlier in the week, other policymakers, such as Richmond Federal Reserve Bank President Thomas Barkin, have expressed less hawkish views. Barkin suggested that the recent stronger-than-expected data on the U.S. economy might be influenced by challenges in making accurate seasonal adjustments. Boston Fed President Susan Collins is still anticipating three interest rate cuts this year if inflation consistently trends towards the 2.0% target.

The Atlanta Fed released its GDPNow estimate for Q1 2024 at 3.4%, falling short of the expectations of 4.2%. This data aligns with Barkin's expectations. However, other data, such as PMIs indicating economic expansion and declining initial jobless claims, does not support the idea of interest rate cuts. Bets on interest rate cuts by the Fed in March decreased to 17.5% from 20.0% this week, while expectations for cuts in May declined to 53.4% from 59.9%. U.S. 10-year Treasuries yields rose to 4.15% from 4.02%, potentially leading to a dismissal of hopes for interest rate cuts in May.

The upcoming release of January inflation numbers is deemed an important milestone. The S&P 500 is considered technically and fundamentally overbought. The forward price-to-earnings ratio for the S&P 500 is noted at 20.4, and if it rises above 22, the benchmark may not see further gains throughout the year.

The S&P 500 has surpassed the final upside target zone at 4850-4950 points, hinting at a potential correction window opening next week. Therefore, betting on a rally before that could be risky. Reversal patterns are anticipated, with the first already emerging, signaling a standard correction of 5-7% within the next two months. The starting point of this correction is yet to be defined.

Oil prices rebounded strongly, reaching the $82.00-84.00 resistance for Brent crude benchmark, following Israeli Prime Minister Benjamin Netanyahu's rejection of a Hamas ceasefire proposal. This development increased the likelihood of further upside moves in oil prices.

Gold prices, having reached mid-term upside targets at $2000-2100 per troy ounce, are currently testing the support at $2010-2030 per ounce. Rising Treasuries yields are weighing on prices, potentially leading them to $1920 if the support at $2010 per ounce is breached.

The currency market is mostly unchanged, with expectations of another wave of the upcoming downside correction for the Dollar being diluted by strong economic data. However, it remains risky to bet on both the rising and declining EURUSD. A return to the 1.11500-1.12500 area for the pair is likely, but a drop to 1.05000 should not be excluded.