Weekly Focus: Inflation Is Unlikely to Halt the S&P 500 Rally

The broad market S&P 500 index consolidated close to resistance at 4720-4730 points at the beginning of the week, as it awaited the week’s major event – the U.S. October inflation data publication which is due to be released on Wednesday.

Prices in the United States rose by 5.4% year-on-year in June and with a slight rebound to 5.3% in August they are still on the record highs of August 2008. Investors’ hopes for inflation to slow down this summer were shattered, and during the fourth quarter we are likely to witness traditionally high inflation as the economy usually takes up speed during the Christmas season.  No wonder consensus suggests that the inflation in October has picked up 5.8%. If this forecast is confirmed on Wednesday, inflation will post a record high seen last time in January 1991.

Frightening perspective. But is it so bad for the market in the short-term? Seemingly no, as the Federal Reserve’s (Fed) meeting was just held and the decision to start the tapering of  the bond purchase program of $15 billion a month was made, although no final date has been reported. The next meeting is scheduled for the 14-15of December and any extraordinary monetary decisions are unlikely to be made until then.

So, inflation figures may bring some volatility to the market, but the S&P 500 index will likely resume its rally soon after the publication. Bulls may get a fundamental support from another good reporting season where more than 81% of reporting companies beat profit consensus forecasts, and also benefit from the huge $1.2 trillion infrastructure bill that was recently approved by the U.S. Congress. There are some more psychological and technical reasons for investors to bet on the rally, as this Christmas could be the last chance to get a quick profit on the rallying stock market before the Fed stops supporting it next spring. Moreover, the resistance at 4720-4730 points is seen weak and may easily fall letting the S&P 500 index go further up towards 4800 points by the end of this week.

The oil market is squeezed by political, economic and technical issues. Traders are waiting for the U.S. Administration to make their move after OPEC+ rejected its call to raise production above previously agreed 400,000 barrels per day. Basically, U.S. policymakers have three options to react. The firsts option is to return to the nuclear deal with Iran, but it might be complicated and unlikely to happen in the short run. The second is the approval of the NOPEC bill that would consider OPEC as a cartel, but this is a harsh move. The third option, which is more likely, is market intervention from U.S. crude reserves. Such interventions are unlikely to drastically change the supply and demand balance but it may pressure oil prices and temporary force their sharp drop. So, in the mid-term we may expect crude prices to return to their highs with the wide trading range of $75-95 per barrel, which would mean that the U.S. would flood the market with its oil reserves.

Gold prices are crawling towards the important resistance level at $1840 per troy ounce. If they fail to hold above this level by the end of November, we may likely expect another wave of selloffs to $1550-1650 per ounce.

EURUSD is now at the pivotal point where the downward trend could be reversed. If the pair would hold above the resistance of 1.16200 it may get a chance to rise towards 1.17000-1.17200. And the latter is a zone of the trend reversal.

The GPBUSD technical picture is less optimistic as we may expect another wave of the decline to 1.35000 this week. Some buy opportunities for the Pound may come up only in the beginning of next week.