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Major stock indexes are treading water ahead of Thursday’s critical consumer price index report that could determine the Federal Reserve’s next moves on interest rates.

Dow Jones futures edged up slightly overnight along with S&P 500 futures and Nasdaq futures. But the major indexes gave back morning gains on Wednesday, turning negative briefly before recovering to close near session highs.

The Nasdaq hit resistance at its 50-day moving average for a second straight day before closing slightly above that key level. The S&P 500 and Dow Jones sit right around their 200-day averages. The small cap Russell 2000 also bumped up against its 21-day line.

Thursday’s CPI report will likely cause significant swings in the markets and dictate near-term direction. Economists predict consumer prices rose 0.3% in September vs. 0.6% in August, while the annual inflation rate likely cooled from 8.3% to 8.1%. Core CPI, excluding food and energy, is expected to have increased 0.4%.

Declining gas prices in recent weeks should dampen headline CPI. But core inflation remains stubbornly high, making the Fed’s path forward unclear.

Soaring mortgage rates above 7% are slowing the housing sector while the Fed’s rate hikes cool other parts of the economy. Many investors hope signs of weakening demand will lead the central bank to pause its aggressive tightening campaign.

But Fed officials stress the need for “restrictive” policy and dismiss market hopes for rate cuts in 2023. Still, bond yields have fallen sharply in recent days as traders scale back rate hike expectations.

Key Levels Hold As Indexes Consolidate

After plunging over 20% this year, the S&P 500 has moved sideways over the past month. The blue chip index is down 5.8% year-to-date.

The tech-heavy Nasdaq has shown more resilience, clawing back 14% from its June lows. Still, the composite remains down nearly 30% in 2022.

Coming off a historically weak September, October often brings renewed volatility. The S&P 500 has ended October with a gain 61% of the time since 1950, according to LPL Financial. But October is also known for turbulent swings.

The Dow Jones and S&P 500 are finding support right around their 200-day moving averages. Holding these levels indicates the long-term trend remains up.

But both indexes face resistance near their 50-day lines and would need to decisively reclaim those levels to signal a sustained uptrend.

The small cap Russell 2000 continues to substantially underperform, trading 16.5% below its 200-day line. The index barely held above last week’s lows at 1660.

Many leading growth stocks are showing renewed strength, with heavyweights like Nvidia flashing early entries. But speculative names in sectors like biotech and solar energy remain deeply out of favor.

Treasury Yields Plunge As Markets Bet on Fed Shift

After topping 4.3% in late September, the 10-year Treasury yield has plunged back near 3-month lows around 4.5%. The two-year yield also fell back below 4.5% after hitting 4.7% last month.

Rapidly declining Treasury yields reflect lower expectations for Fed tightening. Markets are now pricing in a peak Fed funds rate around 4.75% by early 2023, with rate cuts possible by year-end.

Just a week ago, futures indicated the Fed would hike aggressively to around 5% by March 2023 and hold rates steady into 2024.

While policymakers continue to talk tough on inflation, the plunging yields suggest traders are betting on a Fed pivot. Central bankers have even cited the easing financial conditions as a reason they can be less aggressive.

But some economists argue more market turmoil may be needed to decisively break inflation.

Earnings Roll In As Q3 Draws To Close

With the third quarter earnings season getting underway, analysts have modestly reduced profit estimates but still expect growth to continue.

Delta Air Lines reports Thursday morning, with the airline sector facing multiple headwinds. Delta just suspended flights to Tel Aviv along with United, American and other carriers due to conflict between Israel and Gaza.

Banks kick off earnings next week with reports from JP Morgan, Citigroup, Wells Fargo and Morgan Stanley. Falling Treasury yields may negatively impact banks’ lending margins.

The critical tech earnings will ramp up in late October with Microsoft, Google, Meta and Apple all due to report. Software and semiconductor stocks have warned of slowing demand from corporate clients.

While 2022’s sharp rate hikes portend slower growth, markets are hopeful the economy can achieve a soft landing. But along with stubborn inflation, risks remain elevated.

Stocks At Key Levels As Leadership Emerges

The Nasdaq shows tentative signs of leadership as it flirts with retaking its 50-day moving average and continues forming a possible bottom.

Heavyweight stocks like Apple and Microsoft have stabilized while smaller players flash early entries. Nvidia, DraftKings, Sterling Infrastructure and Novo Nordisk are among names breaking out or flashing buy signals.

Nvidia extended its rebound from the 50-day line Wednesday even as broader markets sold off, a sign of relative strength. Shares are working on a possible flat base and regaining the 21-day line would offer a bullish entry.

Danish drugmaker Novo Nordisk is breaking out past a buy point as its promising obesity treatment significantly reduced risk of chronic kidney disease in a Phase 3 trial. Rival Eli Lilly also spiked to new highs.

But diabetes and dialysis stocks plunged on the disruptive news, with DaVita cratering 17%. Investors will closely watch to see if increased competition weights on margins and profits.

Canada-based Sterling Infrastructure continues rising from its 50-day average, offering an alternate entry above last week’s high. Shares are working on a possible IPO base ahead of earnings at the end of November.

Online betting platform DraftKings is retaking its 21-day line as it forms a possible base. The stock found support at its 200-day average last week and reclaimed the $30 level. Analysts see strong long-term growth potential despite current economic uncertainty impacting consumer spending.

While riskier parts of the market remain under pressure, more leaders emerging would signal improving demand. New America Innovators Fund manager Will Denyer suggests looking for resilient names holding key support levels.

“We want to see higher-quality growth stocks finding a bid first,” he said on a recent IBD Live show. “That’s a healthier sign than chasing the most-beaten down speculative names.”

Fed Turning Dovish Could Fuel Market Rally

With the midterm elections just weeks away, markets are closely tuned into signals from the Federal Reserve on whether more extreme rate hikes are coming.

Recent comments from Fed officials indicate central bankers may slow their tightening pace as the cumulative impact of rapid rate increases is felt across the economy.

“We all believe that to get inflation under control, we need monetary policy to be restrictive for some time,” Chicago Fed President Charles Evans said this week. “Quite frankly, I think we’ve done a lot.”

Traders increasingly expect the Fed to go on hold after a 50 basis point hike in December. Markets are even starting to price in potential rate cuts late next year.

But Fed Chair Jerome Powell has emphasized policy will need to remain “tight” for an extended period to decisively curb inflation. And he has pushed back on expectations for interest rate reductions any time soon.

Still, the recent easing of financial conditions with falling yields may give the central bank room to be less aggressive. The Fed faces immense pressure to engineer a soft landing and avoid recession.

And with the economic headwinds accumulating, a pause in rate hikes could reinvigorate stocks. The recent market resilience suggests investors are anticipating a Fed shift to sustain the aging bull run.