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S&P 500 Outlook Talking Points:

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S&P 500 Outlook: US CPI to Guide Index, Financials May Lead

After posting the worst weekly performance of 2019 last week, the S&P 500 rallied at the open of Monday’s session despite the largest drop for Boeing since September 11, 2001. The bearish price action for the Dow’s highest weighted member was seemingly undone by strength in the tech and semiconductor sectors.

Apple notched a solid gain, upwards of 3%, while Nvidia popped 7% higher on news of a potential acquisition. While Monday’s broader-equity price action appeared tied to single-stock developments, the S&P 500 will likely look to the release of US CPI and its implications for the Fed’s policy to influence Tuesday’s trading.

S&P 500 Price Chart: Daily Time Frame (October 2018 – March 2019) (Chart 1)

S&P 500 price chart

As an integral piece of data for the Federal Reserve, a surprise in US CPI could deliver a shock to US equities. In accordance with the central bank’s data-dependent strategy, a CPI beat could spur a retreat from the Fed’s recently dovish tone. Should markets anticipate any hawkish change in the Federal Reserve’s rate hike expectations, expect the S&P 500 to fall under pressure. With that said, the financial sector may exhibit greater price sensitivity given the implications on interest rates and lending outlooks.

S&P 500 Price Chart: Daily Time Frame (January 2018 – March 2019) (Chart 2)

S&P 500 price chart with XLF ETF

S&P 500 Price chart overlaid with ratio of SPX to XLF (Financials ETF) in red, Fed Funds interest rate futures in blue

Showcased by the ratio of the S&P 500 to XLF, an ETF that tracks stocks in the US financial sector, the industry was pressured during November and December’s rout. Further, the relationship between Fed Funds rate futures to XLF can be seen in the reaction to the dovish tone first voiced in late November when XLF dove alongside the probability of a rate hike from the Fed.

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Therefore, financials will be an area to watch in Tuesday’s equity session. With warning signs flashing for the S&P 500, a strong CPI beat could spark deeper bearishness for the index. At the same time, a CPI miss could look to drive the index back to nearby resistance at 2785 - 2815. The resistance band has proved impenetrable since early October and will provide resistance to any drive higher in tomorrow’s session. To trade tomorrow’s US CPI release, read our Trade the News Trading Guide.

In addition to US CPI, the S&P 500 and other US equity markets will keep a close watch on Tuesday’s Brexit proceedings. In the event UK MPs vote to back UK Prime Minister Theresa May’s Brexit plans, expect a positive reaction to spill over into the index. Should the motion fail, as is widely expected, the index would then look to Wednesday’s vote. For a full breakdown of the different Brexit scenarios and what they could mean for markets, read Brexit Impact on GBP: How the Pound Might Move After Parliamentary Vote.

--Written by Peter Hanks, Junior Analyst for DailyFX.com

Contact and follow Peter on Twitter @PeterHanksFX

Read more: Stock Market Fund Flows: S&P 500 Retreat Sparks Demand for Defensives

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