SPX500 Dipped After Fed Minutes Sparked Recession Fears

Headline CPI Cooled

Yesterday's data showed that headline Consumer Price Index (CPI) decelerated sharply in March to 5.0% y/y, from 6.0% in the prior month, in what is the lowest level in nearly two years. However, Core CPI - which excludes food and energy prices - inched up to 5.6% y/y, from 5.5% previously.

These figures follow the recent pattern of easing headline readings, but stickier core ones. The significant moderation in the all-inclusive measure, was driven by lower energy prices since the Energy Index decreased by 6.4%, offsetting the rise in food prices. ^[1]

However, a series of OPEC+ countries decided to slash their oil output by more than 1.5 million barrels per day from May, on top of the existing reduction plan that had been agreed in late 2023 ^[2]. The announcement send oil prices higher and can put upward pressure on inflation.

The Fed Sees Recession

The US central bank had raised rates by a small 25 basis points last month, constrained into a more conservative approach, following the failure of Silicon Valley bank and the ensuing banking rout. Wednesday's accounts of that meeting, showed that "several participants" considered keeping rates unchanged due these events, which would "likely result in tighter credit conditions" and weigh on hiring and inflation. ^[3]

What stood out the most though, was the revelation that Fed staff projected a "mild recession" for the US economy, because of the potential effects of the aforementioned banking developments. This recession is expected to begin later this year, with a recovery to follow in the subsequent two year.

New Earnings season

Markets will now turn to the weekly jobless claims and Friday's retails sales, to assess the state of the labor market and consumer demand. Furthermore, the latest earnings season gets underway against a highly uncertain backdrop, with big automakers such as Tesla Motors Inc, Big tech and other sectors in the spotlight. The banking sector kick thing of this week though, with heavyweights such as JP Morgan, reporting tomorrow.

SPX500 Analysis

The US index had a volatile session yesterday, as the deceleration in headline inflation sent it higher, but the Fed minutes sparked fresh fears over recession and SPX500 ended the day with losses. This creates risk for further slide that could test the EMA200 (at around 4,035), although a strong catalyst would be required for the ascending trendline from the 2022 lows to be breached.

On the other hand, soft inflation figures and prospects of recession, create expectations for a less aggressive stance from the Fed. Markets price in another hike to 5.25%, but also see rate cuts after that, as CME's FedWatch Tool currently assigs the highest probability to rates falling at 4.5% by the end of the year. ^[4]

After a poor week first half to the week, SPX500 finds support today and above the EMA200 (black line), bias is on the upside. The road to new 2023 highs is open (4,196), although a bigger advance towards and beyond 4,326 could prove tough.