The key to the success or failure of the US stock market rebound lies in tonight's US April CPI!

The global spotlight is now focused on the US CPI data for April, which will be released tonight. In the current economic situation, with inflation lingering, CPI has become the most critical data influencing the US stock market.

At 20:30 on Wednesday Beijing time, the US Department of Labor will release the April CPI data. Major Wall Street investment banks have relatively small differences in their forecasts for April CPI, with most believing that inflation will slightly slow down. The current consensus forecast is as follows:

The month-on-month CPI for April is expected to rise by 0.4%, the same as March; the year-on-year increase is expected to decrease slightly from 3.5% in March to 3.4%.

The core CPI, excluding food and energy, is expected to rise by 0.3% month-on-month, lower than March's 0.4%; the year-on-year increase is expected to fall from 3.8% to 3.6%.

However, even if inflation eases, this may still not satisfy the Federal Reserve. Overnight, Federal Reserve Chairman Powell stated during a speech in Amsterdam that the data from the first quarter has reduced his confidence in cooling inflation, therefore the Fed cannot provide a clear answer on whether or when interest rates can be lowered.

In fact, US inflation did not start smoothly in the second quarter. Earlier data showed that the April PPI rose by 0.5% month-on-month, nearly double the expected value, accelerating to 2.2% year-on-year, the highest level in a year.

All these indicate that the Federal Reserve may maintain higher interest rates for a longer period. Market expectations for the number of interest rate cuts within the year have decreased from six times at the beginning of the year to two times, with the probability of a rate cut in September being less than 50%.

Dan North, Senior Economist at Allianz Trade North America, stated that even if CPI meets consensus expectations, the Federal Reserve is unlikely to consider cutting rates before September.

After reaching new highs in mid-April, the US stock market experienced a pullback, but as we enter May, market sentiment has improved and US stocks have resumed their upward trend. One significant reason for this volatility is the fluctuating market expectations regarding US inflation data and Federal Reserve policy outlook. Therefore, it can be anticipated that if inflation exceeds expectations again, it may once again dampen risk sentiment and test the support level of US stocks; if there are signs of cooling inflation, it may boost market confidence and support the continued rebound of US stocks

Housing Inflation Highlights Stickiness, Rent Increases Persist

The biggest highlight of the April CPI data will be housing costs, which account for about one-third of the CPI weight. Within housing costs, Owners' Equivalent Rent (OER) holds the absolute dominant position.

Over the past year, the Federal Reserve has been hoping for a relief in rental market pressures, expecting to replicate the impressive inflation decline trend seen in 2023.

However, the reality is that while OER has fallen from its peak of 8% in April last year, the year-on-year increase in March still reached 5.9%, far exceeding the overall inflation target of 2%. This means that despite the overall slowdown in inflation, rent increases persist, highlighting the stickiness of housing costs.

Goldman Sachs predicts that the month-on-month rent increase in April will slow to 0.37%, but OER will remain strong at 0.45%, citing rising rents for new tenants and the widening gap between rents for new tenants and existing tenants in single-family homes.

In addition, Nomura and Barclays expect OER to increase by 0.44% and 0.46% month-on-month in April, respectively.

It is worth noting that compared to food and energy prices, rents often have a certain lag in their response to economic conditions and policy adjustments. This means that even if economic growth slows down, the inertia of rising rents may continue for some time.

We have not seen any major changes in the real estate market. Changes in population structure are slow.

Furthermore, the so-called "super core CPI" (non-rental core services) is also worth paying attention to. Barclays expects the month-on-month growth rate of non-rental core services in April to slow to around 0.4%.

Barclays also predicts that the month-on-month growth rate of core services CPI will slow from 0.52% to 0.44%, mainly due to easing inflation pressures in areas such as transportation, healthcare, and "other" services, which will also help lower the "super core CPI" for the month.

US Stocks May Face More Intense Volatility

Institutions generally believe that this week's CPI data will be the key driver of sentiment and trading direction for US stocks in the near future.

Strategists led by Marina Zavolock at Morgan Stanley believe that in the 1990s, US stocks rose around the Federal Reserve's pivot driven by bond-sensitive industries such as real estate, construction, materials, and utilities.

The key catalyst for trading success or failure is this week's US CPI.From the reaction in the derivatives market, investors generally expect that the CPI data will bring significant volatility.

The derivatives strategy team led by Maxwell Grinacoff at UBS stated that they believe the implied volatility (VIX) and the volatility of implied volatility (VVIX) have bottomed out in the short term, and the CPI data will lead to implied volatility in the US stock market exceeding 1%.

UBS recommends selling put options to fund call options spreads ahead of the key CPI and retail sales data releases, preparing for a moderate rebound in volatility risk premium.

In addition, there have been some changes in market pricing.

Bank of America Merrill Lynch's derivatives strategy team, led by Ohsung Kwon, pointed out that in the event of CPI data coming in lower than expected, rate-sensitive sectors may experience a "squeeze" rebound, with upside potential exceeding the downside risk when data comes in higher than expected. This is because over the past five months, inflation data has consistently exceeded consensus expectations, and the rate market has already priced in expectations for five rate cuts this year.

However, Bank of America Merrill Lynch believes that the stock market is capable of absorbing higher inflation. If the data meets expectations, this can at least temporarily alleviate concerns about inflation, which would be positive for the market.

John Stoltzfus, Chief Investment Strategist at Oppenheimer Asset Management, expects that given investors' high attention to the April CPI report, recent market volatility may continue to provide investors with opportunities to "buy the dip" during market declines.