A big week ahead for equities on CPI and FOMC A big week ahead for equities on CPI and FOMC A big week ahead for equities on CPI and FOMC

A big week ahead for equities on CPI and FOMC

Peter Garnry

Chief Investment Strategist

Summary:  Sentiment remains bullish in equities with last week's performance driven by strong broad-based gains in commodities and continuous animal spirits in US technology stocks and especially our bubble stocks basket. If tomorrow's US May inflation report delivers a lower than estimated core inflation then it could bolster the "Fed pause" narrative and extend momentum in technology stocks. A melt-up scenario cannot be excluded at this point.

Key points in this equity note:

  • Animal spirits are roaring back this year and recently we are seeing bubble like dynamics as our bubble stocks theme basket is beginning to be among the best performing baskets again.

  • A positive surprise tomorrow in US May inflation figures on the core inflation could bolster the “Fed pause” narrative adding fuel to the already red-hot rally in US technology stocks.

  • The FOMC is priced for no change to the policy rate on Wednesday, but for equities the decision is less important as the real risk is economic data (recession and inflation) more than whether 25 basis points in the policy rate.

The speculative fever is back and it could get crazier this week

Last week was all about hot commodities and bubble dynamics evolving further in equities. Commodities were higher across the board last week due to talk about Chinese stimulus, weather conditions negative impacting expected crop yields, and higher energy prices off OPEC+ cuts (although these gains are quickly being faded by the market). The strong commodity markets lifted our commodity basket by 3% last week making it the best performing theme basket.

The second strongest gainer was the bubble stocks basket which reflect investors’ increasing positive optimism on nonprofitable technology companies. This comeback has been fueled by the AI hype, but EV stocks have also contributed to the stronger risk sentiment in this part of the market. Staying with the electric vehicle theme it is interesting to observe how weak oil has been given that US nominal GDP growth is still at 7%. In fact, this is the weakest oil market since 1984 at this level of nominal GDP growth suggesting two things. Either EV adoption is already to hurt marginal oil demand earlier that previously projected, or the oil market is still a good signal that will soon prove that GDP growth will slow further.

Russell 2000 ETF | Source: Saxo

A positive surprise on inflation would be rocket fuel for equities

The first real test of sentiment in equities will be tomorrow when we get US May inflation figures at 12:30 GMT with consensus looking for the headline CPI m/m to drop to 0.2% from 0.4% in the previous month, while core CPI m/m is expected to remain at 0.4%. The market’s US 10-year inflation swap, which is contract where cash flows are exchanged between two parties against the CPI Index, is still anchored at 2.5% which is slightly above the average since 2004. In other words, the market is still not pricing in a different long-term inflation regime. As our clients would know Saxo’s position has been very different since early 2021 where we have argued again and again that the fragmentation game and the green transformation will be very inflationary over the decade of transition.

For equities the best news would be a positive surprise to the core inflation as that would bolster then narrative of a Fed pause in the policy rate which would likely go straight into the animal spirits and the price action we observe in the bubble stocks. Our latest equity notes The AI hype feels like an echo from past bubbles and Equities signal calm waters, or do they? outline the bubble dynamics in equities as of today. There is an increased index concentration, bubble stocks are performing well, and we see equity options volatility coming down massively.

Tesla share price | Source: Saxo

A Fed pause in sight?

On Wednesday night, the FOMC rate decision will grip markets with consensus looking for no rate hike, and then 60% probability for a rate hike at the July meeting according to Fed Funds futures. The Fed economic projections are likely to show higher expected growth in 2023 and lower unemployment rate compared to the previous projections. In addition, the median dot plot will likely highlight one more rate hike before the peak is reached with the target range set to 5.25-5.50%. The key question for the market will then be whether the economy can absorb the new policy rate and even grow at a healthy pace without slipping into a recession. The Fed maintained roughly this currently policy rate for around four years during the period 1995-1999 in which the US economy was able to grow and corporate earnings did well, and at least not stopping a bubble in technology to form. Another scenario is the 2006-2007 period in which the Fed paused around mid-2006 with equities and the economy continuing higher all the way through to the end of 2007.

For equities the lessons over the years have been that there are moments when policy decisions mean a lot to equities, but the vast majority of the time it means little. This time is not the big pivot point for equities as they relate to the policy decision. What matters the most for equities are whether we get a recession or not, and right now equities are pricing in that a recession is not very likely, or if we get one it will be a mild one in relative terms with nominal GDP growth still around 6%.

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article


The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)

40 Bank Street, 26th floor
E14 5DA
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo is a registered Trading Name of Saxo Capital Markets UK Ltd (‘Saxo’). Saxo is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992