Barclays explains why the S&P 500 continues to rise despite strong CPI and PPI data

With Consumer Price Index (CPI) and Producer Price Index (PPI) again beating expectations and economic activity data looking a bit weak, investors are wondering why the stock market keeps rising. ing.

Despite what appears to be an unfavorable combination, the stock has remained largely unperturbed so far.

In response to these concerns, Barclays strategists said, “This may be because current data flows are actually maintaining a ‘not too hot, not too cold’ status quo.”

“Investors continue to see the soft landing story as half-full as the Fed has supported current market prices so far with three rate cuts since June,” they wrote. It pointed out.

Additionally, the large amount of cash recently allocated to money market funds, amounting to about $1.5 trillion, set aside for investment in risk assets is fueling optimism.

But rising inflation could challenge the ongoing stock market rally if the Federal Open Market Committee (FOMC) becomes more aggressive and expectations for rate cuts change, strategists warn. did.

Apart from a possible adjustment in the future interest rate path, the tapering of quantitative tightening (QT) is also another important factor to monitor in the coming months. After years of rate hikes and the recent QT, central bank liquidity concerns seem to have had little effect on the lingering bullish stock market.

“While bullish price movements in tech, credit, cryptocurrencies, etc. suggest there is no shortage of liquidity, the opposite is actually the case,” the Barclays team wrote.

“In fact, excess liquidity in the U.S. banking sector has been very supportive, accelerating RRP (reverse repurchase agreement) outflows and leading to bank reserve accumulation.”

There are still several months left as RPP funding dwindles, but reserve expansion cannot continue indefinitely. Investors have begun to express concerns that QT could ultimately impact asset prices.

Recent Federal Reserve communications suggest a cautious approach to balance sheet reduction and the possibility of QT reduction after RRP is exhausted.

“Further clarity on this point would be welcome to reassure investors,” the team said.