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S&P 500 Retreats as Bullish Sentiment Fades Ahead of Key US Inflation Data

S&P 500 Retreats as Bullish Sentiment Fades Ahead of Key US Inflation Data

Diego Colman, Contributing Strategist
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  • After a choppy session, the S&P 500 ends the day lower below the 4,500 psychological level
  • Bullish momentum appears to be fading ahead of U.S. CPI data later this week
  • Risk assets could suffer if January inflation accelerates and leads trader to price in a steeper hiking cycle by the Federal Reserve

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Most read: Top 5 Events for Financial Markets to Watch Out for This Week

After a strong performance last week, the S&P 500 lost momentum on Monday, retreating 0.37% to 4,483at the closing bell, draggeddown by tech weakness, especially a sharp pullback in Meta Platforms sharesfollowing reports that the company may shut down Instagram and Facebook in Europe over a data-sharing dispute with regulators.

Concerns about the Fed’s tightening process also weighed sentiment, preventing stocks from building on their recent rebound. For context, bets that the U.S. central bank will dial back pandemic era support more forcefully have increased following Friday’s NFP data. The report published before the weekend showed that U.S. employers added 467,000 jobs in January, more than triple the consensus forecast, a sign that the economy continues to improve and is ready to withstand higher borrowing costs.

With employment dynamics steadily improving and inflation running rampant, the Fed is poised to start raising rates next month and reduce the balance sheet sometime after liftoff, but the aggressiveness of the cycle will depend on the trajectory of inflation. We should get a better picture of the trend in consumer prices on Thursday, when the U.S. Bureau of Labor Statistics releases the latest results. According to the median projection, January headline CPI rose to its highest level since early 1982, rising to 7.3% year-over-year from 7.0% in December.

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A red-hot CPI print could cement expectations of a 50-basis hike at the March FOMC meeting, driving up Treasury yields across the curve, particularly those in the short-end. This situation couldundermine the S&P 500, but it may have a greater negative impact on the tech universe, considering that the sector is largely valued on futures earnings (broadly speaking, when yields rise, companies’ future cash flows are worth less in present when discounting them at a higher rate, a common technique to value stocks).

On a different front, the ongoing earnings season will continue to attract some interest, but with mega-cap results already released (AAPL, MSFT, AMZN, GOOGL, TSLA, FB, etc.), the reporting period may become less and less relevant by the day for the S&P 500, paving the way for investors to refocus on incoming economic data and the outlook for monetary policy.

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The S&P 500 bounced between gains and losses for most of the day on Monday, but selling pressure accelerated in late trading, pushing the index slightly below the 4,500 area. If the price remains below this psychological level in the coming sessions, traders should prepare for a possible pullback towards the 200-day SMA and, in the worst-case scenario, a retest of the 4,280 region.

On the flip side, if bulls reclaim the 4,500 level, trendline resistance can been seen near the 4,555 area. If we see a move above this ceiling, the S&P 500 could head towards 4,590, the 61.8% Fibonacci retracement of the 2022 sell-off


sp500 chart

S&P 500 (SPX) Chart by TradingView


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---Written by Diego Colman, Contributor

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.