Markets Sentiment Pinned On Two Important Events This Week

Following positive economic statistics that increased the likelihood of a soft landing for the US economy, investors boosted the stock market on Friday, sending it soaring to a higher closing price. But the US stock market is more focused on this week's economic data, and traders will be keeping an eye on two key economic events that might influence the direction of the major US stock indexes.

Background

Another solid reading for US non-farm payroll statistics was reported on Friday, with actual numbers of 199K and forecasts of 184K. The Bureau of Labour Statistics releases the US nonfarm payroll (NFP) statistics on a monthly basis, which is an important economic indicator. Excluding those working in agriculture, the public sector, private homes, and nonprofits, it quantifies the overall number of paid workers in the United States. Analysts and investors pay careful attention to NFP data since it shows how the labour market is doing and how the economy is functioning overall.

On top of that, we saw that the US unemployment rate has fallen from 3.9% to 3.7%, which is an encouraging sign for the US economy, suggesting that things are looking up. Keep in mind that the job market is one of the primary basic considerations for the Federal Reserve when making monetary policy decisions. Consumer sentiment was also reported on Friday; the data revealed a score of 69.4 compared to the forecast of 62.0, which is the most important statistic for traders.

Market participants took away from Friday's US economic data the following: decreasing inflation forecasts and stronger consumer confidence provide credence to the claim that the US economy would likely have a soft landing. Because of this, the S&P 500 gained significant traction, and the index closed at a record high for 2023, with prices still vying with the intraday high of 4609. In general, the S&P 500 is still on track to end the year with a 20% gain. However, the mood and price action will be very influential this week.

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The defining moment

Tuesday will see the publication of the US CPI statistic, the most crucial economic data in terms of the US economy and stock market. Inflation rates both monthly and annually will be shown by the data. I believe it's very probable that next year we may see an upward modification on the Federal Reserve's objective for US inflation, which is 2%. The Federal Reserve has done an outstanding job bringing inflation down from its very high level of 9.1% to 3.1% as of the latest meeting, but for the time being, they are focusing on getting the actual inflation number as near to this level as feasible. It is very probable that this week's inflation data will show additional improvement, as oil prices have lost much of their traction and the chances of a further upward spiral are stacked against them. Investor and trader confidence would skyrocket if inflation fell into the two-handle area, defined as a value below three.

What does it imply, therefore, if inflation is lower or greater than expected?

Whatever the number may be, one thing is certain: the Federal Reserve has hit the apex of its interest rate cycle, thus there will be no further hikes in rates unless the US Consumer Price Index shows a very unusual reading.

Consequently, the only variables that will change are the number of rate decreases that will occur in 2024 and the length of time that the interest rate stays fixed. It is my firm belief that the first interest rate decrease might occur as early as the end of Q1 next year, provided that the US inflation index remains below 3. This speaks to the possibility of four 25-basis-point interest rate reduction cycles. If the figure stays in the three-handle, the rate reduction procedure may be postponed, and the first cut might not happen until late or midway through the second quarter of next year. There could be essentially three separate interest rate reductions, with a 25 basis point drop in each.

Going Forward

Traders will be preparing for Wednesday, the most significant day of the week, when the Fed Chairman will be under scrutiny, after the US CPI data has settled. I am certain that the Federal Reserve will maintain its policy of guiding the US economy towards a gentle landing. There is little doubt that the Fed is riding a wave of favorable economic data that was reported last week.

If the US inflation rate has dropped inside the two handles, the Federal Reserve will be pleased and their confidence will increase. Market participants may not be interested in what the chairman has to offer, but he will manage and phrase his remarks properly. If inflation stays in the three-handle, market participants may start to freak out because they will think the Fed is serious and that they need to reevaluate the first rate reduction in 2023.

Finally, many variables will determine the future course of the US stock market, but the most crucial is the inflation figure, which will set the tone for the majority of these elements. The market has had a fantastic run so far this year. Market participants would be pleased with a number if it indicated inflation is back in the two handles.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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