Weekly Summary: S&P 500 Recovered Inflation Losses

The S&P 500 broad market index futures are adding modest 0.1% to 5029 points this week. This is a great achievement of the benchmark after it lost 2.0% on Tuesday on worse-than-anticipated January inflation data in the United States. The benchmark may set another all-time high after posting a 5050 points record on Monday.

January's consumer prices in the United States expanded to 3.1% YoY, surpassing the expected 2.9%. Monthly readings rose from 0.2% to 0.3%. Core CPIs, excluding volatile food and energy prices, also exceeded expectations. Despite this, the robust GDP figures suggest that the U.S. economy remains resilient to high-interest rates and external shocks, alleviating concerns about the Federal Reserve (Fed) initiating rate cuts before June 2024. However, the picture is tempered by a significant decline in retail sales by 0.8% in January, marking the largest drop in a year. Higher inflation may have been driven by rising oil prices, but the Core CPI, which excludes food and energy prices, rose even higher than headline inflation. Additionally, industrial production contracted by 0.1% MoM in January, signaling potential temporary weakness in the American economy.

The stock market rebounded sharply on Wednesday and Tuesday, with weak retail sales viewed as a counterbalance to the inflation threat. U.S. 10-year Treasuries yields hover around 4.25-4.30%, reaching a two-month high. Bets on interest rate cuts in March and May have dissipated with the inflationary pressures. Even bets for cuts in June dropped to 51.9%, according to the CME FedWatch Tool.

While seasonal factors could explain the economic weakness in January, it becomes more concerning amid heightened overbought tensions in the stock market and the withdrawal of large investors from stocks. The upcoming Producer Prices Index (PPI) and FOMC Minutes on Friday will be crucial in understanding the Fed's hawkish stance and the potential reasons behind it.

Nevertheless, the Fed has made its point that it is likely to cut its fund rate not earlier than June.

The S&P 500 has surpassed the final upside target zone at 4850-4950 points, hinting at a potential correction. This correction period may last up to the middle of the 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 five weeks. The starting point of this correction is yet to be defined. But before a next all-time high record is possible.

Oil prices are trying to push through the resistance at $81.00-83.00 per barrel for Brent crude benchmark. The ongoing war in the Middle East increases the likelihood of further upside moves in oil prices above $83.00 per barrel in February and March. The next resistance is located at $87.00-92.00 per barrel.

Gold prices, having reached mid-term upside targets at $2000-2100 per troy ounce, are currently retesting the support at $2010-2030 per ounce from the downside. If the resistance survives prices could slip to $1920 and further down.

Volatility in the currency market is increasing, with expectations of another wave of the upcoming downside correction for the Dollar being diluted by strong economic data. However, the U.S. Dollar failed to strengthen further despite disappointing inflation numbers. This is a sign of weakness. 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.