Following a surge of optimism regarding a ceasefire between the U.S. and Iran, the S&P 500 closed Thursday with solid gains. The FTSE 100 however was flat. All eyes are on the release of the Consumer Price Index (CPI). This is the primary driver for today’s price action as it dictates the Federal Reserve’s next move on interest rates. The report is due at 1.30pm. A “hotter” reading than expected could spook the bond market and stall the current equity rally, as it suggests the Fed may need to keep rates higher for longer.
The main issue in the medium term is the high oil prices, despite the ceasefire oil prices remain near $100. If oil stays elevated near $100 (or climbs further on any ceasefire doubts or supply disruptions), this inflationary impulse could persist into April and Q2 data, complicating the Fed’s path. Markets have already been repricing for fewer (or delayed) rate cuts this year. Longer-term, sustained high oil adds stagflationary risks (higher prices + potential growth slowdown from energy costs).
With this in mind stock markets are unlikely to make new all-time highs, they could rally further but upside is limited. The FTSE 100 was flat yesterday probably because the rally is large, the FTSE is up 9% in the last three weeks. Investors see the risk of higher inflation and they will sell shares at these levels.