Investors’ newfound optimism on the U.S. economy faces an important test on Wednesday, with consumer price data set to show whether the soft landing hopes that have fueled recent gains in equities are justified.
Many of those moves have been driven by rekindled hopes that the Federal Reserve can pull off an economic soft landing, where it is able to cool inflation without badly hurting growth and eventually transition to cutting interest rates. “It’s a pretty critical short-term report,” said Keith Lerner, co-chief investment officer at Truist Advisory Services. “If you look at a lot of the markets right now, they’re at potential inflection points.”
“While there is potential for significant volatility in either a CPI beat or a miss, equity volatility is priced for a more benign outcome,” the Barclays strategists wrote. “The market overall is really pricing in rate cuts,” said Jack Ablin, chief investment officer at Cresset Capital. “In order to fulfill these expectations, we’re going to need data like CPI to cooperate.”
Investor sentiment is at its most bullish level in a month, according to the widely used survey from American Association of Individual Investors, which could raise the bar for positive surprises to help stocks. But the portion of investors reporting bullish sentiment, 40.8%, is below where it stood earlier in the year.
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