This trading week begun in a prudent way while investors are waiting for
ECB meeting and inflation data from the United States.
The most intriguing question is inflation as this Thursday fresh May
estimate on the inflation in the United States would be released.
A waning week finally came to a major event of NonFarm Payrolls in the
United States that will be released on Friday. However, investors are getting
more and more thrilled fearing that strong labor market may push the Federal
Reserve to announce tapering of its $120 billion bond purchase program, and its
Chairman Jerome Powell may indicate such intentions in his speech today.
There are almost no doubts that this NonFarm Payrolls report would
present excellent figures. ADP has already reported that 978,000 new jobs were
created in May. Our statistical modeling shows less optimistic result with new
jobs figure between 650,000 and 929,000. Nevertheless, even this values are
above official forecast at 650,000.
Investors may consider unemployment figure could be little worse than
expected, at 6.0-6.1% vs 5.9% expected earlier, and that it could overshadow
excellent NonFarm Payrolls report. But, such considerations may be misleading as natural
rate of unemployment rose from 4.5-5.0% to 6.0% as a result of the pandemic
relief payments. If this is true then higher inflation in the United States perfectly
fits in the cyclical economic model in the end of a cycle when lack of labour
force push salaries higher winding off inflation.
But
if this considerations are true then American economy is at the top of the
economic cycle at this very moment and the corona crisis was not the end of the
cycle. So, we should expect the end of the cycle soon with classic bearish
market with the first phase in summer and the second phase with a severe
decline in autumn and winter.
Although
it might be a pure assumption at the moment, the Federal Reserve may well
understand the tricky present situation with the inflation continue to wind
off. The only chance to avoid this is to pull the breaks now. Such scenario is
not priced in at the moment. So, strong NonFarm Payrolls data together with Mr.
Powell indications of inflation pressure may sharply increase volatility.
Even
in this case S&P 500 broad market index is not supposed to fall lower than
4120 points. But, traders should be careful not to rush buying the dip if the
index plunges by the end of the day.
Oil
market is also waiting for the NonFarm Payrolls report. Fears of monetary
policy tightening curb crude prices. Nevertheless, Brent crude prices are still
around $70.50 a barrel. So, a basic scenario for crude prices is an upside
movement to $72.80 a barrel of Brent crude. Sell positions at this level could
be very interesting to open.
Gold prices plunged
amid fears of Fed monetary policy tightening and rising Treasuries yields.
U.S. 10-year Treasuries yield rose to
1.63% triggering a downside scenario for gold prices to dive to $1800 per troy
ounce.
The
Greenback launched a counterattack. The EURUSD fell below 1.21850 support level
with possible downside targets at 1.20500 and 1.19300. GBPUSD returned to 1.40900,
and may fall further to 1.40000 and 1.39300.
The
USDJPY is heading to the nearest resistance level 110.60, where it may reverse.
However, considering potential of the Greenback it would be better to look for
the next resistance level at 111.90 to open any sell positions, or get the
downside confirmation signal from the U.S. stock market.