It was a quiet session overnight, with traders content to sit on their hands ahead of the release of the US inflation report on Wednesday night.

Following last week’s FOMC meeting, which noted its next decisions would be driven by “incoming data, meeting by meeting”, inflation prints for April and May (both set to drop before the June Fed meeting) have gained added importance.

More so against the backdrop of Friday’s non-farm payrolls, which despite downward revisions, saw the unemployment fall back to its cycle low of 3.4% and included an upside surprise in average hourly earnings as they rose to 4.4% YoY (vs 4.2% exp).

What is expected from the April CPI report?

The market is looking for Core CPI to rise by 0.3% in April, which would see the annual rate ease to 5.5% from 5.6% previously. The range of expectations is from 5.3% to 5.6%.

Headline inflation is expected to rise by 0.4% MoM, which would see the annual rate stay steady at 5%. The range of expectations is from 4.7% to 5.2%.

The annual headline inflation rate has not been below 5% in 17 months - since November 2021. Hence should we see an annual inflation print with a “four” handle, it would likely be welcomed by equity markets - more so if core CPI rises by less than the 5.5% expected.

However, if the core inflation remains firm, the market will not get the resolution it is looking for. Currently, the rates market has a 12% chance of a June hike priced in, followed by a 33% chance of a rate cut in July.

S&P 500 technical analysis

The S&P 500’s bounce from the support at 4070/60ish negates the short-term downside risks and reinforces its importance.

We use 4070/60 as the near-term bull/bear divide and note that while the S&P 500 remains above 4070/60, a retest of range highs 4200/10 is likely. Aware that should the S&P 500 see a sustained break above 4210 (three daily closes above), it would put the August 4327 high on the market’s radar.

To re-energise the downside, the S&P 500 needs to remain below 4210 and then see a sustained break below 4070/60 which would then bring into play 4000 and then 3800.

S&P 500 daily chart