Weekly Summary: S&P 500 Mistuned by Record High Inflation

The S&P 500 broad market index was in quite good shape at the beginning of the week as it rose above the key support level of 4480-4510 points. Positive corporate earnings reports on Tuesday, especially from Disney, pushed it to 4590 points and directed it toa target at 4650-4700 points.

At the moment when there seemed to be no black clouds in the sky the inflation thunderstorm hit the market. U.S. Consumer prices in January suddenly rose to 7.5% year-on-year, well above bold expectations of 7.3%. This record inflation, which was lastly seen in 1982, struck the stock market as it could push the Federal Reserve (Fed) towards a very hawkish monetary move. Moreover, such high inflation may signal that the Fed lost control over inflation. James Bullard, St. Louis Federal Reserve Bank President quickly responded to the news by saying that he wants to see interest rates at 1.0% by July 1 and to start clearing up Fed balance sheet in the second quarter of 2022.

Bullard’s scenario may well even turn over to the dovish side in order to bring inflation under control. Otherwise, the Fed should acknowledge that it has lost control over inflation, fire its Chairman Jerome Powell, and revise its inflation target from the longstanding 2%.

For the moment the upward trend for S&P 500 is still intact, keeping the upside target at 4650-4700 points. But traders should seriously consider risks if they want to attend this unstable rally. This target could be reached only if S&P 500 closes next Tuesday above 4530 the landmark. Otherwise, the U.S. stock market may suffer in the second half of February.

The oil market is struggling. A technical downside correction on Tuesday was amplified by the White House and Japanese Administrations that waved dismay over high energy prices. Brent crude prices dived below the support at $91.50-92.00 per barrel, but solidly recovered by the end of the week close to $93.00 per barrel and may continue towards the upside target at $94.00-94.50.

Gold prices reached the resistance level at $1840 per troy ounce and rolled back after interest rates on 10-year U.S. Treasuries surged above 2.0%. Gold prices may dive into a deeper correction to $1550-1650 in March.

EURUSD has almost reached it weekly targets but called back to the support level of 1.13500-1.13700 after January’s inflation data was released on Thursday. However, any positions should be opened with extreme caution and with a mandatory stop-loss to avoid huge risks. It would be wiser to wait until next Tuesday. If the Euro slides below 1.14600, the downside direction would be more likely.

The expectation of a GBPUSD correction towards the support level of 1.34500-1.34700 has failed. The Cable jumped to 1.36000 instead and rebounded to 1.35000. The strong support for the Pound still could be found at 1.34500-1.34700 as it is trying to move towards 1.36000. Any further buy operations should be conducted very carefully with a mandatory stop-loss order.