CPI today holds the key to a shift in stock sentiment – Nomura

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April retail inflation numbers will have to come in softer than expected again for equities to gain traction, Nomura says.

The CPI comes out this morning with economists predicting a drop in the headline annual rate to 8.1% from 8.5%. But strategists and investors will be more focused on the core month-on-month rise, seen at 0.4%.

S&P futures (SPX) (NYSEARCA:SPY) are higher ahead of the numbers and a print below 0.4% could give buyers the conviction that wasn’t there when Tuesday’s early rally quickly evaporated.

“For stocks to get legs, it will likely require a second consecutive CPI miss (that) then leads to softer Fed rhetoric and accordingly, market expectations will then see Policy path be further reset (already dialing-back expectations for multiple 50s beyond July) – where a ‘miss’ could see the market more aggressively downshift Fed pricing towards a post July ‘pause’ expectation,” Charlie McElligott of Nomura’s equity derivatives team wrote in a note.

“‘Glass-half-full,’, it sure seems as if we are closer to ‘bottoming-out’ on the sell flows from a behavioral perspective, as (Monday’s selloff) looked to be a very ‘liquidation’ like risk-management exercise,” McElligott said.

Stocks have also suffered from the “shadow leverage” of the crypto/speculative boom era, which was in “full-tilt capitulatory unwind mode” as stablecoins broke the buck over the weekend, he said.

“One thing I will say however…is that it feels as if the Fed is already sniffing and ‘priming the pump’ for a directional ‘softening rhetoric’ pivot,” he added.

“I think that Equities now look more like a ‘buyers-strike’ at this juncture (because) we are still held hostage by the fact that the Fed has to get 50bps in June done at the very least per the prior ‘deal’ with the market when they walked back and killed the potential for 75bps ‘hawkish left tail’ scenarios last week.”

Canaccord’s Tony Dwyer says stocks look oversold enough for a summer rally.