S&P 500 up 0.3%, trading in 4730 area as equity investors breathe sign of relief that US CPI wasn’t worse

• US equities are up broadly higher with markets relieved that the latest US CPI report was in line with expectations.
• The S&P 500 is about 0.3% in the 4730 area whilst the Nasdaq 100 is probing 16,000.
• The S&P 500 is 3.0% up from Monday’s lows and the Nasdaq 100 5.0%.

US equities are trading broadly in the green, with the S&P 500 up 0.3%, the Nasdaq 100 up 0.5% and the Dow up 0.1%, as equity investors digest the implications of the latest US inflation report for Fed policy this year. Broadly speaking, and despite headline Consumer Price Inflation (CPI) reaching its highest level since June 1982 at 7.0% in December, the report was not seen as boosting already very hawkish Fed policy expectations for 2022 any further. Indeed, equity investors seem to have reacted to the fact that the CPI report came in broadly as expected with relief. Even though the report strongly endorses the Fed’s stance that multiple rate hikes and a reduction in the size of the balance sheet is likely warranted this year, the lack of fresh hawkish surprises has weighed heavily on the dollar. This seems to be offering some support to the equity space.

Wednesday’s gains come on the back of upside seen in wake of Tuesday’s Fed Chair Jerome Powell Senate testimony. Just as seen in the market’s reaction to Wednesday’s inflation data, the lack of hawkish surprises from Powell, who largely stuck to the main points/takeaways from the December meeting and its minutes, saw US stocks rally at the time. The S&P 500 index, which is right now trading around the 4730 level, is now more than 3.0% up versus its earlier weekly lows. The growth stock/tech-heavy Nasdaq 100 index, which is currently probing the 16,000 level, it up roughly 5.0% from earlier weekly lows.

A key driver of the rebound, particularly in duration-sensitive big tech names, has been a pullback from recent highs in US yields. For example, the US 10-year is down 3bps on Wednesday and back to trading just above 1.70% having been above 1.80% on Monday. Equity investors will be keeping a key eye on bond markets going forward, as a further rapid push higher (like seen last week) could easily trigger another equity market tumble (like seen last week). For the rest of the week, Fedspeak and US data will remain important to monitor, especially Vice Chair nominee Lael Brainard’s Senate hearing on Thursday and the release of the US December Retail Sales report on Friday.

But arguably the most important US equity market driver for the rest of the week will be the unofficial start of earnings season on Friday when big US banks including JP Morgan, Citigroup and Morgan Stanley will report Q4 results. “Earnings may exceed expectations and that is what is keeping investors active despite knowing that the Fed is going to start tightening in the next several months” one analyst was quoted by newswires as saying. “You'll also see less commentary on earnings calls referencing supply chain constraints this season” he added. If true, earnings season could be a welcome bullish distraction from the theme of Fed tightening and higher interest rates for a few weeks ahead of the Fed’s January 26 meeting.