S&P500

The US stock market rallied on Friday, but the retracement is far from over.

The main American stock indexes closed higher: the Dow Jones Industrial Average added 0.5%, the NASDAQ - 1%, the S&P500 - 0.7%.

The Nikkei 225 rose by 0.5%, despite reports of slumping industrial production in Japan. The output index slipped by 5.4% m/m in September.

China's retail sales and industrial production beat expectations, rising year-on-year in October by 4.9% and 3.5% respectively.

Oil prices continue to be negatively affected by high inflation in the US and the EU. Brent is trading near the last week's low of $81.50.

The amount of new COVID-19 infections worldwide fell to 360,000 during the weekend, thanks to a transient drop in cases reported in the US (the "Sunday effect"). The number of new coronavirus cases in the United States decreased from 90,000 to 30,000. However, the total amount of confirmed infections worldwide has remained steady since mid-September, with surges reported in Germany, Russia and Ukraine.

The S&P500 is trading at 4,682 and is expected to be in the 4,640 - 4,710 range. Inflation data for October continue to influence the US markets. The CPI jumped to a 30-year high of 6.4% year-on-year. The inflation rate has settled above 5% since April. US president Biden has pledged to tackle the issue. The Federal Reserve remains committed to its dovish stance on interest rates, despite the CPI surpassing the regulator's accepted level of 2.5%. The Fed is expected to hike the rate in mid-2022, but may revise their agenda. The last time the Federal Reserve faced simultaneous high inflation and high unemployment was in 1987-1991.

The Democrats in Congress are negotiating on the $2 billion social spending and infrastructure package. So far, they have yet to reach a compromise within the party.

Market watchers note the retail sector is showing increased profitability during the current period of high inflation. However, a rapid rise in retail prices would quickly lead to an interest rate hike from the Fed, followed by an overall economic slowdown. Some experts think the growing inflation is lowering bond yields and making the stock market more desirable for investors. An interest rate increase would quickly put an end to this uptrend.

On Tuesday, the US retail sales data for October will be released. The indicator is expected to increase by 1.2%-1.5% compared to 0.7% in September.

USDX is trading at 95.00 and is expected to stay in the 94.70-95.30 range. The dollar has matched the weekly and yearly high during today's open, reaching the level of July 2020. High inflation is likely to push the greenback up even further, as the market eyes the next Fed meeting in December.

USDCAD is trading at 1.2530 and is expected to stay in the 1.2480-1.2570 range. The pair is likely to rise, similar to USDX. However, an increase in oil prices could drag down USD/CAD.

With no important news at the beginning of the week, the US market could continue its retracement.