Mixed Stock Market As Investors Await Key CPI Data | Daily Market Analysis

Key events:        

• Australia – Retail Sales (MoM)
• USA – EIA Short-Term Energy Outlook  

At the beginning of the week, the stock market was mixed and lacking direction in terms of risk appetite, as investors await the release of key US CPI data and a string of corporate earnings reports later in the week.

Dow Jones Industrial Average closed lower amidst range-bound trading as investors awaited further catalysts, including the consumer inflation report that is due later in the week.

Dow fell by 0.17%, or 55 points, while the Nasdaq gained 0.2%, and the S&P 500 remained flat. While PacWest Bancorp announced that it had cut its dividend by 1 cent from 25 cents a share in the previous quarter to boost its finances, regional banks continued to dominate attention. Despite opening up over 30% higher, PacWest Bancorp gave up the bulk of its gains. On the other hand, Berkshire Hathaway helped boost financials after rising by around 1%, following quarterly results that beat Wall Street estimates on both the top and bottom lines.

The focus has shifted to the CPI data, following strong US payrolls and US average hourly earnings data for April. Unless the US CPI rate continues to fall, it will be difficult for the Federal Reserve to justify pausing interest rate increases for long, unless they alter their mandate. Until the CPI figures are confirmed, with headline prices expected to remain stable at 5% and annual core inflation predicted to decrease slightly from 5.6% to 5.5%, we anticipate a generally range-bound market with a risk-off sentiment.

Today, gold prices stabilized above crucial levels and traded within narrow ranges as traders awaited key inflation data this week to gauge the state of the US economy. Concurrently, concerns over a banking crisis and a potential recession persisted. The precious metal experienced significant profit-taking on Friday, plunging from its near-record high levels, following a better-than-expected labor market report that suggested the Federal Reserve will remain hawkish for an extended period this year. Although markets expect the bank to pause its rate hike cycle, they have started to reduce bets on potential rate cuts this year. Interest rates remaining higher for longer will likely constrain any upward momentum in gold prices.

At the same time, the British pound reached a more than one-year high against the US dollar, hitting a peak of $1.2668, its highest level since April 2022, before edging down slightly to $1.2616. Investors are closely watching the pound this week, ahead of the anticipated Bank of England rate announcement on Thursday. The central bank is widely expected to raise the base rate from 4% to 4.5%, following a 7-2 vote in March to increase it from 4% to 4.25%.

The dollar's resurgence is putting pressure on EUR/USD, which has been trading within a narrow range of $1.1080 on the high end and $1.0950 on the low end in recent weeks. A significant catalyst for a potential further decline in EUR/USD could be twofold: firstly, a stronger-than-expected CPI reading in the US that could lead to a reassessment of interest rate risk, and secondly, weaker PMI surveys from Europe that suggest a potential slowdown in the Eurozone later in the year, possibly prompting the ECB to halt its interest rate hiking cycle earlier than anticipated.