(Bloomberg) — Next week’s US inflation print looms as key for the trajectory of equities and wagers on Federal Reserve interest rate cuts, according to Morgan Stanley strategists.
Inflation figures for April due May 15 will offer fresh insights about the US economy after employment data out Friday showed the labor market is cooling. Some traders took the latest job numbers as an indication that the Fed will be able to start cutting rates as early as September.
The consumer price data will have a major role in “informing the path of monetary policy and the market’s pricing of that path,” a Morgan Stanley team led by Michael Wilson wrote in a note.
“The price reaction on the back of this release may be more important than the data itself given how influential price action has been on investor sentiment amid an uncertain macro set up,” Wilson said.
Read more: US Jobs Post Smallest Gain in Six Months as Unemployment Rises
The S&P 500 has climbed over the past two weeks amid optimism that Fed easing is still likely this year, with solid corporate earnings supporting sentiment. The US benchmark closed Friday above 5,100 points, about 14% higher than Wilson’s 12-month target of 4,500.
Wilson said either the so-called soft-landing or no-landing scenarios remain possible for the US economy. “This uncertain backdrop warrants an investment approach that can work as market pricing and sector/factor leadership bounces between these potential outcomes,” he wrote.
The strategist recommends a barbell of quality cyclicals and quality growth stocks as a result.
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