Inflation data, midterm elections loom for struggling US stock rally

A sputtering US stock rally faces a double-dose of potentially market moving events next week: US midterm elections and inflation data that could influence the Federal Reserve’s monetary policy.

Wall Street’s rebound on Friday dissipated some of the gloom that pervaded since the Fed on Wednesday hiked interest rates, while Chairman Jerome Powell said policymakers will likely take rates higher than envisioned in their bid to crush inflation, reports Reuters.

Nevertheless, the S&P 500 finished the week with a 4.6 per cent loss, likely burning many bulls that had jumped aboard an October rally that lifted the index more than 8 per cent from its lows. A break of the index’s Oct 12 closing low would mark the fifth time this year that stocks have rallied by 6 per cent or more only to reverse course and plumb fresh depths.

Meanwhile, data from BoFA Global Research showed some $62.1 billion flowing into cash in the latest week, the largest inflows since the Covid-19 crash of early 2020, underlining pessimism that has prevailed among many market participants.

“We think we are on the path for a rocky landing for the economy, and next week we will get two pretty big clues as to what it’s going to look like,” said Steve Chiavraone, head of multi-asset solutions at Federated Hermes, who is holding larger-than-normal allocations in cash and commodities.

Consumer price data has driven huge market moves this year, as surging inflation forced investors to ramp up expectations for Fed rate hikes. A stronger-than-expected reading on Nov 10 would likely bolster the case for the Fed to continue.

Investors are now pricing in a peak of around 5.1 per cent for the fed funds rate next year, compared to expectations of just under 5 per cent before the most recent Fed meeting. The central bank has raised rates to 3.75 per cent this year.

“If we get lower inflation reading then you could get a relief rally based on that data,” said Emily Roland, co-chief investment strategist at John Hancock Investment Management. In that case, however, “markets will be more focused on higher probability of a recession.”

Strategists at Wells Fargo believe CPI is more likely to fall short of expectations. They see the Fed’s terminal rate falling by 12 basis points or more if CPI comes in at a monthly gain below 0.4 per cent. Analysts polled by Reuters expect a 0.5 per cent monthly rise.