US stock index future opened significantly higher after yesterday's rally, as traders continue to bet on lower US inflation and expect strong economic stimulus from China.
Yesterday, the Nasdaq 100 and S&P 500 closed at their highest levels since April 2022. Today, index futures are showing gains of 0.3% and 0.5% respectively. Market participants are increasingly confident that the latest US CPI data for May 2023 will show that price pressure is declining, allowing Fed policymakers to pause their monetary policy cycle tomorrow. This would be the first such pause following 10 consecutive increases since March 2022.
Undoubtedly, the market's dovish expectations regarding the Fed's decision this week are closely tied to cooler inflation and are pushing the markets higher. Any CPI components that exceed expectations could lead to even more significant price revisions and influence risk appetite, driving up demand for risky assets. The index could be positively influenced by a significant decline in energy prices in May, which would offset the growth in other categories.
However, some market participants anticipate a possible rate hike by the Fed next month, as the swap market anticipates an additional quarter percentage point hike at the July meeting. However, it is necessary to wait for the June data before jumping ahead.
As for other markets, the pound sterling has strengthened its position, and the euro has also recovered. The fact that interest rates in the UK may continue to rise is supported by fresh data on the UK labor market, which unexpectedly showed significant resilience in April. Unemployment in Britain has decreased to 3.8% over the last three months. These data have intensified expectations of continuing rate increases by the Bank of England.
In Asian markets, the regional stock index rose by more than 1%, as China is reportedly considering introducing broad stimulus measures, as previously warned. Speculation among investors about an imminent cut in China's long-term interest rates also intensified on Tuesday after the central bank unexpectedly lowered the seven-day reverse repo rate.
On the technical side, demand for the S&P 500 remains quite high. Buyers still have a chance to continue the uptrend, but the bulls need to fiercely defend the level of $4,320, from which it may surge back to $4,350. An equally important task for the bulls will be maintaining control over $4,375, which would strengthen the bull market. In case of a downward movement due to reduced risk appetite ahead of the Fed meeting, bulls must act around $4,320. A breakout below that level will quickly push the trading instrument back to $4,290 and pave the way to $4,175.
