The Labour Market
report for June that was released last week came as a real surprise. The
Non-Farm Payrolls was at 209,000, lower than expected 225,000, while unemployment
level dropped to 3.6% from 3.7%, in line with expectations.
The number
of new jobs created by the U.S. economy in June at 209,000 is still strong, and
it had little disappointing effect on the overall strong Labour market report.
But, a slowdown in Non-Farm Payrolls demonstrated that expectations were largely
exaggerated. This fact pushed down 2-year Treasuries’ yield, a most adequate
gauge for Federal Reserve (Fed) interest rates moves. The U.S. Dollar dropped
by 0.7%.
Investors
are seeking a recovery for these assets as the 2-year Treasuries’ yields, while
they are still sitting at 4.91%. The Greenback is struggling as the U.S. Dollar
index is seen rising by a 0.1% on Monday. This demonstrates a belief that nothing
has changed in the investor’s expectations that the Fed will increase interest
rates in July one more time before the interest rate hike cycle will end.
The most intriguing
is the fact that the inversion of the debt yield curve is at the highest level
since 1981. The contraction of this inversion and a possible end of the interest
rates increase period could be far more dangerous, as this combination usually
leads to the recession and deteriorating stock indexes. The logic “the worse is
the data the better is for the market” may simply doesn’t work anymore. Thus,
the SYP 500 broad market index dropped by 0.2% on Friday despite a slightly weaker-than-expected
Non-Farm Payrolls reading. The index continues to look to the downside, while
hovering around 4400 points.
The U.S.
Minister of Finance Janet Yellen, who are mostly an optimist, refused to rule
out the recession possibility saying that it is “not completely off the table”.
“We have a healthy economy, a great labour market, inflation too high and a
concern of ours and the American people, but coming down over time,” Yellen
said. “And it’s my hope that, and belief, that there is a path to bring
inflation down in the context of a healthy labour market. And the data that
I’ve seen suggests we’re on that path.”
This week
June inflation data in the United States will be released. The expected slowdown
to 3.1% YoY from 4.1% YoY in a previous month should be viewed as a positive
development, but if the assumption that a contraction of the inversion of the yield
curve is correct than such a rapid decline in inflation may lead to a drop of
stocks’ prices.
The same
might be true for the Q2 2023 corporate reporting. This week JPMorgan, Chase, Wells
Fargo and Citi will open a reporting season amid negative expectations. FactSet,
which is tracking the corporate performance and provide market analysis, expect
that S&P 500 listed companies will lose 7.2% YoY of their profit, the
largest contraction since Q2 2020. So, a weak data this time may have a
negative effect on the stock indexes.
Technically,
the S&P 500 index continues to have an upside formation with targets at
4250-4350 points, that have already been met. The market bounced from the
resistance at 4440-4460 points, and has almost reached the support at 4340-4360
points. If this support would surrender the formation will change to the
downside, which is seen very tempting amid emerging downside signal.
Brent crude
prices are gravitating to the resistance at $76-78 per barrel as hopes rise
that Saudi Arabia and Russia will continue to cut oil exports. Once the support
would be broken, recession scenario chances will become very high. Its targets
are at $40-60 per barrel of Brent crude.
Gold prices
are moving inside the mid-term upside formation with targets at $2000-2100 per
troy ounce that have already been met. But the situation has changed
dramatically as the important support level of $1980-2000 per ounce was
smashed. Short positions were opened after prices tested the $1970-1980 former
support level with targets at $1890-1910 per ounce. The first half of this
trade was closed at $1910 per ounce, while the second half was left open with
the stop-loss order moving to $1980 to avoid any losses, and amid expectations
of some extra profit. When prices would pass the $1900 per ounce level this
downside scenario will be activated.
The
Greenback fell a victim off exaggerated expectations when the Labour market
report was released on June 7. Still, the American currency is strengthening compared
to its peers. It has chances to continue rallying for a while. But it is too
risky to go long on the Greenback at the moment. It would be better to wait for
a decline of the EURUSD below 1.06000 to seek out sell opportunities for the
Greenback.
Two major
positions were opened for July. First, is a short position for the EURUSD at
1.08900-1.09200 with the take profit and stop loss both set at 5000 points from
the opening price. A long trade for the AUDUSD was opened from 0.66400-066600
with the same size of the stop loss and take profit orders as for the EURUSD.
Two operations balance each other and should be kept to mitigate risks.