NAS100 Cautious Following the US CPI Inflation Update

US Inflation

Inflation in the United States has been moderating for a while now, allowing the central bank to slowdown the pace of its monetary tightening. Fed Chair Powell has recently alluded to this progress, speaking again last week of the "disinflationary process" which has now started and is mostly evident in the goods sector. However, it is clearly too early for the central bank to declare victory and Mr Powell warned of a "bumpy" and "long way to go". ^[1]

The latest inflation update on Tuesday, showed that the Consumer Price Index (CPI) ticked down again in January, but only slightly, while coming in higher than expected. Headline CPI printed +6.4% y/y vs 6.2% expected and 6.5% prior. The Core reading was +5.6% y/y vs 5.5% expected and 5.7% prior.

Hawkish Fed Speak

Following the CPI report, we got another round of hawkish commentary from various Fed officials that are voters this year. Ms Logan said the "we must remain prepared to continue rate increases for a longer period than previously anticipated" if necessary ^[2], while Mr Harker stressed that "we are not done yet", although "likely close" ^[3].

These comments echoed similar remarks by other policy makers over the previous days, while Chair Powell - even though still relaxed - warned that they may have to produce "more rate hikes, more than is priced in" in case of "strong labor market reports or higher inflation reports" ^[1]

Higher Rate Expectations

Perhaps Mr Powell does not need to be more forceful, since he views financial conditions as "more well-aligned" with the Fed's intended policy path ^[1], following the recent blockbuster jobs report. The Fed's dot-plot implies rates peaking at 5.25% and although markets did not believe officials would hike that much, they have now embraced this level.

In fact, at the time of writing CME's FedWatch Tool assigns the biggest probability to an even higher terminal rate of 5.5% ^[4]. Renewed hawkish commentary and yesterday's CPI report, seems to support the view that there is still more work needed to restore price stability.

NAS100 Analysis

The tech-heavy index is cautious today following these developments, with the technical outlook not much changed. The repricing in market expectations around the terminal rate create headwinds and NAS100 is vulnerable to the critical region around 12,000, which contains the 38.2% Fibonacci of the December low/February highs rebound and the EMA200.

Daily closes below this level would pause the upside momentum and expose the index to the daily Ichimoku Cloud (around 12,400-12,300), although sustained weakness below this area does not look particularly easy at this stage.

Despite having lost its vigor lately, NAS100 seems quite resilient to the policy headwinds and steps into bull territory with 20% gains form the December lows. Above the aforementioned key area (around 12K), it is in the driver's seat and can push for higher highs towards 13,207, but does not inspire confidence yet for tackling 13,724.

Markets now turn to today's retail sales and industrial production from the US. The previous figures were quite poor and had pushed the index lower.