US CPI is falling but can it drive a breakout on US futures?

Central banks have always considered inflation as a critical factor in determining their monetary policy stance. Recently, amid signs of an impending recession and a banking crisis that continues to bubble under the surface, the Federal Reserve is now seemingly set to pause on its rate hikes.

A trend lower in inflation would certainly help to justify this position. The monthly data indicates that their expectation may come to fruition in the next few months, whilst the April Consumer Price Index (CPI) has hinted at the direction of travel. But can this finally be enough to drive a breakout in US equity futures?

Stubbornly high inflation is set for a reduction in the coming months.
April CPI helps but is not a game-changer
S&P Futures and NASDAQ Futures continue to look for a breakout

Stubborn inflation will accelerate lower in May

Inflation is falling in the US, but is it fast enough? The Federal Reserve is now seemingly on pause in its monetary policy tightening. There are concerns over the economic impact of the tightening and the financial stresses on the US banking system that have been generated by such an aggressive monetary policy tightening.

The Fed hiked in May but seems set to now pause the tightening for the next few meetings at least. With this in mind, the FOMC will be keen to see inflation continuing to track lower, and hopefully faster than it is currently.

Looking at the monthly data, it is likely to get its wish, at least on headline inflation anyway.

The FOMC may not formally use the Consumer Price Index in its assessment of inflation, but the committee will still be keeping a watchful eye on its trends.

In the next two months, there will be some good news. Month-on-month growth of +0.9% in May 2022 and +1.2% in June 2022 will drop out of the data. Even if the average monthly growth of c. +0.4% is seen again, this would pull headline CPI down to 4.4% in May and then down to 3.9% in June.

Looking at the Cleveland Fed’s Inflation Nowcasting tool, this is exactly the trend that the Fed is anticipating.

There is less positive news when it comes to the less volatile core CPI data though. Monthly inflation of over +0.6% was seen in each of May and June last year. This will drop out but core prices are still rising at around +0.4%. If this continues, then it means that core CPI will reduce much less decisively, to around 5.2% and 5.0%. The Cleveland Fed is looking for a slightly higher 5.4% in May.

This means that whilst the Fed is on pause there is no compelling argument to be cutting rates quite yet.

April CPI drive a dovish reaction

Today’s April CPI data came in marginally lower than estimates. There was good news with the headline CPI dipping to 4.9% (from 5.0%) with the consensus looking for no change. The core CPI also dropped slightly to 5.5% (from 5.6%) but this was in line with where the market was expecting.

This is hardly a game-changing inflation print.

There has been a mild reaction in the interest rate futures markets. The Fed Funds futures are still showing that the FOMC is around its peak rate, whilst the curve is tentatively pricing for a couple of rate cuts towards the end of the year again.

Essentially, this is helping to solidify current market positioning but has not pushed the needle in any decisive way.

Can US futures finally break out?

There is a minimal move towards decisive pricing for further rate cuts beyond where the market is already positioned. This is reflected in the market reaction to the data on US equity futures.

The E-mini S&P 500 futures continue to be held back by the key resistance band of the multi-month range. For several weeks, upside moves into the resistance band between 4145 and 4208 have hit the buffers. Once more this seems to be the case again today.

It seems as though this may continue to be a barrier. With earnings season very much into its maturity, the market needed a bigger downside surprise in inflation today to drive for a breakout. The bulls will be hoping that the big tech stocks can continue to do the heavy lifting for a breakout.

Well, the E-Mini NASDAQ 100 futures have given it a go initially, but once more seem to be just pegged back. The resistance between 13349/13370 has been tough to crack recently. There is still an upside bias to the technical analysis indicators, with the uptrend channel and a positive configuration on the daily RSI.

However, this is still a bull run that is just spluttering in recent weeks. A closing breakout above 13370 would certainly help NASDAQ futures to open the upside towards the August 2022 high of 13740 but might also just help to give the S&P futures a lift too.