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SP500 remains bearish after massive US inflation

The bearish remains intact as the market expects a 1% rate increase at the Fed's July meeting.

US equities traded lower on Thursday as investors are pricing in even more rate hikes after yesterdayโ€™s shocking inflation release. As of writing, the SP500 index was nearly 1% lower, trading near 3,765 USD.

US inflation coming in hot

According to data released on Wednesday by the US Bureau of Labor Statistics, consumer price index (CPI) inflation in the US increased from 8.6% in May to 9.1%in June, way above market expectations of 8.8%. Moreover, the 1.3% monthly change was the largest since 2005.

Core inflation went from 6.0% to 5.9% year-over-year, a slight decrease but still higher than the expectation of 5.7%. The monthly basis increased from 0.6 to 0.7%.

There is currently a 75% chance that the Fed will increase its policy rate by a total of 175 basis points over the course of the next two meetings, according to the CME Group FedWatch Tool. However, the likelihood of a 100 bps raise at the FOMC meeting in two weeks is currently priced in by the market at 83%, up from 0% a week ago.

You may also read:ย Detailed analysis of FOMC Minutes

Fed governors are not so sure about a 1% increase

In an interview with Bloomberg Television on Wednesday night, Cleveland Fed President Loretta Mester was asked if she supported raising interest rates by more than 75 bps at the July meeting. Still, she refrained from saying so, citing significant data releases occurring between now and then. Nevertheless, she said there was “no justification” for rates to increase by less than the 75 basis points that policymakers announced last month.

โ€œWe at the Fed have to be very deliberate and intentional about continuing on this path of raising our interest rate until we get and see convincing evidence that inflation has turned a corner,โ€ she added.

In a separate interview with the New York Times late on Wednesday, San Francisco Fed President Mary Daly stated, “My most likely position is 0.75, based on the data I’ve seen,” adding that she had anticipated the CPI number to be high: “When I saw those numbers, I immediately thought, “This is bad news. I didn’t anticipate positive news.

The June US PPI figures are expected later today. The market anticipates a decrease in factory inflation from 10.8% to 10.7%, with the monthly change remaining at 0.8%. Likewise, the core rate is predicted to drop to 8.1%. But given yesterday’s positive surprise, today’s statistics could also be hotter than anticipated.

The following support for the index should be at previous lows near 3,745 USD, and if not held, the SP500 could decline to the actual cycle lows at 3,640 USD.

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