The week's fundamental highlightsThe financial markets are currently under the influence of a conjunction of themes of fundamental concern, the most important of which are :
- the trade war and the current phase of trade diplomacy
- the current phase of disinflation in the West, which could be threatened by tariffs
- the intransigence of the Federal Reserve (FED) which, unlike the European Central Bank, has not re-committed to cutting its federal funds rate this year
- The increasing likelihood of a US economic recession, linked to the trade war and high interest rates, and the ultimate risk for the equity market, which is stagflation.
- the US budget deficit and public debt, as the Trump administration pushes through its massive tax cut bill and raises the public debt ceiling
- The risk this poses to US corporate bond yields, and hence to corporate earnings prospects (the cornerstone of equity market trends).
- Current geopolitical conflicts
In short, the general level of uncertainty is high, but this has not prevented the equity market from rallying strongly since the beginning of April.
1) This final week of May on the stock market, the fundamental highlight of the week is the US PCE inflation update.
The “FED Minutes” on Wednesday May 28, the second estimate of US GDP for the first quarter on Thursday May 29 and US PCE inflation on Friday May 30 are the three fundamental highlights of the week.
But it is US PCE inflation that will be decisive, as it is the FED's preferred inflation index. Disinflation has picked up again this year, and the downward trajectory is still tending towards the FED's 2% target. However, certain leading inflation indicators (such as consumer inflation expectations) suggest caution in the face of a possible rebound in inflation linked to the trade war.
Below, you can see that core PCE inflation is well on its way to the 2% target, but that there are concerns about a rebound in inflation. It is imperative that US disinflation continues if the FED is to cut interest rates again this summer.
2) For the S&P 500 index, the major support at 5700/5900 points is the technical guarantor of the bullish rally underway since the beginning of April.
This final week, Wall Street's benchmark index will continue to be subject to intense fundamental activity. In terms of technical analysis of the financial markets, the S&P 500 future contract must continue to be closely monitored, as it is the benchmark index for US finance.
The market has taken a logical technical breather in the short term, but the underlying uptrend remains intact as long as the 5700/5900 point support zone remains intact.
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