Wall Street kicked off the week on a cautious note, with traders positioning for key inflation data that will help shape the outlook for Federal Reserve policy and global financial markets.

Stocks, bonds and the dollar saw small moves just a few days ahead of the key consumer price index. The gauge is projected to show moderation while still remaining too high to warrant rate cuts. On Monday, a Fed Bank of New York survey highlighted an increase in expectations for inflation.

Some prominent trading desks are warning that investors should gear up for a potential break in the calm that’s come over stocks. The options market is betting the S&P 500 will move 1 per cent in either direction after Wednesday’s CPI, according to Andrew Tyler at JPMorgan Chase & Co.

“The key risk is a hotter CPI print,” Tyler said. “But upcoming macro data creates a two-tailed risk — with one tied to stronger-than-expected growth fueling inflation concerns and the other being weaker growth fueling either recession or ‘stagflation’ concerns.”

US stocks and bonds are facing upside risk this week as traders keep building long positions, said Goldman Sachs Group Inc.’s Scott Rubner. Commodity trading advisors’ equity and fixed-income demand is notable, with a so-called “green sweep” showing up in most of Goldman’s models. This means investors will keep piling in even if the market goes down. 

The S&P 500 hovered near 5,220. Heavily shorted companies got a lift as GameStop Corp. soared after a cryptic X post from Keith Gill, known as “Roaring Kitty,” who gained notoriety during the 2021 meme-stock frenzy. US 10-year yields fell one basis point to 4.48 per cent.

The all-important inflation data arrive just as a three-week rally had the S&P 500 knocking on the door of its record highs, noted Chris Larkin at E*Trade from Morgan Stanley. “An extension of the rally could depend on whether investors still feel positive about rate cuts after this week’s numbers.”

Before Wednesday’s CPI, economists will parse producer prices data on Tuesday to assess the impact of categories that feed into the Fed’s preferred inflation gauge — the personal consumption expenditures price index. Fed Chair Jerome Powell is also scheduled to speak Tuesday.

“Squeeze risks for rate-sensitive laggards on a CPI miss outweigh downside risks on a CPI beat,” said Ohsung Kwon at Bank of America Corp. “With further hikes ruled out, we think equities may be able to tolerate higher inflation. An in-line print should also be net positive, removing the inflation overhang at least in the near term.”

Stalled-out progress on inflation is probably going to trigger a decline in US equities in the coming months, according to Stifel Nicolaus & Co.’s Barry Bannister. The S&P 500 will likely drop roughly 10 per cent in the second or third quarter to around 4,750, he noted.

A “merely in-line” US inflation report this week “would likely be enough for further risk-asset gains,” according to HSBC strategists led by Duncan Toms.

The stock market “setup” has left it at a critical juncture, according to Matt Maley at Miller Tabak + Co. The fact that equities saw a material decline in April, followed by a nice bounce leaves them vulnerable to a “double top” — which is one of the most-bearish signals in technical analysis.

“If this week’s inflation data creates a substantial reversal, it’s going to be a very negative development,” Maley said. “If, however, this week’s data creates a further rally — one that pushes the major indices meaningfully above their 2024 highs — it’s going to be extremely bullish.”

If recent hot prints prove to be a blip in a disinflationary process, one or two cuts starting in the fall may be reasonable, according to Jason Pride and Michael Reynolds at Glenmede.  But that timeline may undergo further revisions if inflation stays sticky, they say.

It’s difficult to justify buying stocks now due to elevated interest rates, weakening growth and meager potential returns, according to JPMorgan’s Marko Kolanovic.

“We don’t see enough of a return to warrant taking on equity risk at this juncture,” he noted. “The macro outlook is uncertain and for equities, we are entering into a seasonally tricky time of the year, with a challenging combination of inflation at risk of staying too high, profit margin pressures, and elevated positioning.”

Lofty US equity valuations suggest investors have already priced in a lot of stock market enthusiasm, but that doesn’t mean they should start selling, according to Goldman Sachs Group Inc.

The S&P 500 already is higher than Goldman’s year-end target of 5,200, but the fundamental backdrop for share prices remains “very good,” Ben Snider, senior strategist on Goldman’s US portfolio strategy team, said in an interview. He’s optimistic about stocks down the road because of strong earnings from US companies and confidence in the path of disinflation.

Investors ready to trim or ditch their stock exposure because they are worried the S&P 500 is losing steam after a double-digit run up since October should look to history for reasons to stay committed to their US equity allocations.

Since the 1930s, missing out on the 10 best days per decade for the benchmark would have yielded a 66 per cent gain — a fraction of the roughly 23,000 per cent return staying invested through those days would have generated, according to data from Bank of America Corp. More importantly, those best days have come after the worst days for stocks, when selling was likely most tempting, the bank’s analysis showed.

In a week that also sees the release of retail sales, guidance from giants Walmart Inc. and Home Depot Inc. will provide some insight into consumer sentiment amid signs of rising joblessness.

Historically, consumer confidence has moved inversely to the two-year/10-year US Treasury yield spread, according to Lisa Shalett at Morgan Stanley Wealth Management. 

“With curves likely to steepen when rate cuts start, which we forecast by September, it’s unclear whether consumers will view good news as good news or whether cuts will come too late — when consumer moods have worsened as excess savings have been depleted and when a recoupling of the relationship indicates recession, not a soft landing,” she noted.

Still, analysts are ratcheting up earnings forecasts for the current quarter at the swiftest pace in two years, suggesting that the worst of Corporate America’s profit slump may be firmly in the rear-view mirror.

With nearly 90 per cent of S&P 500 companies havinmg reported for this earnings season, upbeat first-quarter results have pushed Wall Street to boost profit projections for the three months through June, Bloomberg Intelligence data show.

Corporate Highlights:

• Apple Inc. has closed in on an agreement with OpenAI to use the startup’s technology on the iPhone, part of a broader push to bring artificial intelligence features to its devices, according to people familiar with the matter.
• Intel Corp. is in advanced talks with Apollo Global Management over a deal that would have the investment firm providing more than US$11 billion in funding for a chip manufacturing plant in Ireland, the Wall Street Journal said.
• Johnson & Johnson sold $4 billion of bonds to help finance its $13.1 billion acquisition of Shockwave Medical Inc., the latest blue-chip firm to seize on thriving debt markets to fund purchases.
• Nasdaq Inc. is considering a sale of Solovis, a provider of portfolio-management software and services, as the exchange operator seeks to slim down following its largest-ever acquisition, according to people familiar with the matter.
• Walgreens Boots Alliance Inc. is reaching out to potential buyers of the £7 billion ($8.8 billion) Boots drugstore chain in the UK, according to people familiar with the matter.
• UBS Group AG Chief Executive Officer Sergio Ermotti said that he intends to stay at the helm of the Swiss bank until the task of absorbing Credit Suisse is complete, meaning his second stint leading the global wealth manager could stretch to almost four years.
• Anglo American Plc rejected a second approach from BHP Group that valued the miner at $43 billion, as pressure builds on the 107-year old company to lay out a compelling vision to survive on its own.

Key events this week:

• Germany CPI, ZEW survey expectations, Tuesday
• Bank of England Economist Huw Pill speaks, Tuesday
• U.S. PPI, Tuesday
• Fed Chair Jerome Powell and ECB Governing Council member Klaas Knot speak, Tuesday
• China rate decision, Wednesday
• Eurozone industrial production, GDP, Wednesday
• U.S. CPI, retail sales, business inventories, empire manufacturing, Wednesday
• Minneapolis Fed President Neel Kashkari speaks, Wednesday
• Japan GDP, industrial production, Thursday
• U.S. housing starts, initial jobless claims, industrial production, Thursday
• Philadelphia Fed President Patrick Harker speaks, Thursday
• Cleveland Fed President Loretta Mester speaks, Thursday
• Atlanta Fed President Raphael Bostic speaks, Thursday
• China property prices, retail sales, industrial production, Friday
• Eurozone CPI, Friday
• U.S. Conf. Board leading index, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 was little changed as of 4 p.m. New York time
• The Nasdaq 100 rose 0.2 per cent
• The Dow Jones Industrial Average fell 0.2 per cent
• The MSCI World index was little changed

Currencies

• The Bloomberg Dollar Spot Index was little changed
• The euro rose 0.2 per cent to $1.0789
• The British pound rose 0.2 per cent to $1.2555
• The Japanese yen fell 0.3 per cent to 156.22 per dollar

Cryptocurrencies

• Bitcoin rose 3.1 per cent to $63,160.48
• Ether rose 1.1 per cent to $2,955.24

Bonds

• The yield on 10-year Treasuries declined one basis point to 4.48 per cent
• Germany’s 10-year yield was little changed at 2.51 per cent
• Britain’s 10-year yield was little changed at 4.17 per cent

Commodities

• West Texas Intermediate crude rose 1.2 per cent to $79.22 a barrel
• Spot gold fell 1 per cent to $2,337.33 an ounce