The S&P 500 climbed to 4,200 at the end of the week.

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After the release of top-level data from the United States of America (US), the S&P 500 index continued its strong upward move on Friday and headed towards 4,200, with a gain of about 1.25% on the day, extending the move. to be done. Day.

The index faced rejection last Friday in the region of 4,210, a level not seen since August last year, and fell back to the region of 4,100 during the week. The S&P 500 found support in this area on Wednesday and moved higher on Thursday following the release of upbeat data in the United States (US).

Nevertheless, the market remains cautiously optimistic on the lack of progress in US debt ceiling talks.

Warmer than expected US core PCE boosts sentiment around S&P 500

On Thursday, market sentiment improved slightly after upbeat US data was released, which helped the S&P 500 move up.

US annual gross domestic product (GDP) showed a second preliminary reading for the first quarter of 2023 at 1.3%, higher than the 1.1% expected by consensus. This is the third consecutive positive quarter for the indicator.

On the other hand, according to the weekly data from the US Department of Labor, in the week ending May 20, 229,000 initial claims for unemployment benefits were made in the United States. This figure improved upon market expectations, which had expected 245,000 applications.

In addition, additional housing data from the Chicago Federal Reserve (Fed) and the Kansas Fed also beat estimates.

Several top-level US data was released at the start of today’s US session. Inflation as measured by the change in the personal consumption expenditure (PCE) price index rose to 4.4% on an annual basis in April from 4.2% in March, the US Bureau of Economic Analysis reported on Friday. The data exceeded market expectations, which placed it at 3.9%. Annual growth in the core PCE price index, the Federal Reserve’s favorite inflation gauge, rose to 4.7% from 4.6% in the same period, compared with analysts’ forecast of 4.6%.

The US Census Bureau has released durable goods claims data for April. The data showed requests increased by 1.1% for the month, higher than the expected -1%. Durable goods orders excluding defense and aviation spending rose 1.4% in April, recovering from a -0.6% decline in the previous month. The data came in well above the expected -0.2%.

The University of Michigan Consumer Sentiment Index rose to 59.2 in May, higher than the previous 57.7 and the expected number. On the other hand, the 5-year consumer inflation expectation component has come down to 3.1% from the previous 3.2%.

Other additional data also includes personal income and expenditure, the balance of trade in goods, and bulk inventories.

Stronger-than-expected data, particularly in the core PCE index or the University of Michigan inflation component, could impact the Fed’s rate hike outlook and sentiment around the S&P 500.

Following the release of stronger-than-expected PCE data, the probability of a further 25 basis point hike in June to a 5.25%-5.50% range has risen to 58%, as measured by the CME’s Fedwatch tool. 32% probability before publication of data:

In an interview with CNBC on Friday, Federal Reserve Bank of Cleveland President Loretta Mester said the personal consumption expenditure (PCE) price index released on Friday underscored the slow progress of inflation. When Meister was asked whether another rate hike was needed at the next FOMC meeting, Meister said, “It’s probably not wise to predict what the outcome of the meeting will be.” “Everything is on the table for the June FOMC meeting,” Mester said.

Debt ceiling talks remain deadlocked, S&P 500 under pressure

Debt ceiling talks in the US continue to move forward but without reaching an agreement with 6 days to go before D-day, June 1, in which the US Secretary of the Treasury, Janet Yellen, has called for an extension to the “‘deadline’ Tagged as “Federal debt ceiling to avoid default.”

US House Speaker Kevin McCarthy assured on Wednesday that the US would avoid default, but said there was still a gap on spending. Still, McCarthy also said policymakers could in principle reach an agreement on the debt later this week.

After Thursday’s meeting, McCarthy said, “negotiators will continue to work to reach an agreement on the debt ceiling to avoid default”. McCarthy also said that “It’s tough. But we’re working and we’ll keep working until we get it done,” reported Reuters.

S&P 500 Technical Analysis

Technically, the S&P 500 has been rejected just above the 4,200 level, the highest level it reached last Friday since August last year.

As of this writing, the S&P 500 has recouped all of this week’s losses and is heading towards the 4,200 level. Above this level, the index may target the highest since August last year which was hit at 4,213 last Friday. If the S&P 500 manages to break that level, it could move to the 4,226 level to close the bearish opening gap on August 19-22, 2022. Beyond this there is no resistance above 4,250 and up to 4,310-4,320 zone, the zone of max last August.

Looking lower, an initial support is near the 4,170-4,175 area. Further down, the index may fall to the area of ​​4,155, with the daily low near 4,140 and the previous day’s low at 4,120. Further downside, the S&P 500 could test key short-term support at the weekly low around the 4,100 level.

s&p 500 daily chart

How does Federal Reserve policy affect the US dollar?

The US Federal Reserve (Fed) has two mandates: maximum employment and price stability. The Fed uses interest rates as its primary tool to achieve its goals, but it must find the right balance. If you’re concerned about inflation, tighten your monetary policy by raising interest rates to raise the cost of borrowing and encourage savings. In that scenario, a decrease in the money supply is likely to increase the value of the US dollar (USD). On the other hand, if the Fed is concerned about a rise in the unemployment rate due to a slowdown in economic activity, it may decide to ease policy through a cut in interest rates. Lower interest rates are expected to increase investment and allow companies to hire more workers. In such a situation, there is a possibility of weakening of the dollar.

The Fed also uses quantitative tightening (QT) or quantitative easing (QE) to adjust the size of its balance sheet and steer the economy in a desired direction. QE refers to the Federal Reserve buying assets such as government bonds in the open market to stimulate growth, while QT is just the opposite. QE is generally seen as a central bank policy move negative to the dollar and vice versa.