S&P 500 Spikes Higher on Better-Than-Expected Inflation Print

Talking Points:

• The S&P 500 stormed higher overnight following better-than-expected inflation data.

• However, skewed positioning suggests that the move higher may prove short-lived as attention turns to today’s FOMC meeting.

The US benchmark S&P 500 index stormed higher overnight, surging as much as 4% intraday before retracing lower to end the day up just shy of 1%, after CPI data came in better-than-expected. The annual inflation rate in the world’s largest economy eased to 7.1% in November, the fifth straight decline in consumer price growth and the lowest reading in eleven months, spurring bets that the Federal Reserve will pivot to a less aggressive monetary policy stance in the months ahead. Most of the moderation was due to a marked slowdown in food and used car prices, however, shelter costs continue to increase. Although this is another promising sign that we have past the point of peak inflation, an overtly dovish pivot seems relatively unlikely given CPI remains over three times higher than the Fed’s mandated target.

US Inflation Rate

Attention now turns to the upcoming Federal Open Market Committee meeting later today, in which policymakers are expected to hike the Fed Funds rate target range by 50 basis points to 4.25-4.50%, with an outside 1-in-5 chance that a more aggressive three-quarter point hike is on the cards. The latter scenario seems relatively unlikely given recent signals from several Fed officials that a shift to a more conventional pace of hikes is warranted to avoid plunging the economy into a recession. Nevertheless, a forceful pushback on the easing of financial conditions seen over the last few days could be likely, especially when markets are still pricing in rate cuts at the tail end of 2023. With that in mind, a cautious approach should be taken by investors into this meeting. Positioning is skewed in an overtly bearish way which suggests that a more aggressive spike higher could occur before prices eventually reverse lower.

S&P 500 Daily Price Chart – Downtrend Resistance Under Pressure

From a technical perspective, the outlook for the S&P 500 remains bearish as price continues to track the downtrend extending record highs set at the beginning of 2022.

The formation of a bearish Shooting Star candle suggests that the recent rally seen over the last five days could be running out of a steam and that a reversal lower is on the cards in the short term.

Slipping back below 4,000 would likely precipitate further selling and bring about a retest of the monthly lows.

On the other hand, a convincing daily close above downtrend resistance could ignite a new bull trend and bring the August highs into buyers’ crosshairs.

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