Last week the NFP report showed once again that the labour market is tight and resilient, impacting the S&P500. What caught the market’s attention though was the data on Average Hourly Earning (i.e. wages).
They missed expectations and the prior numbers were revised downwards. The market interpreted that as a goldilocks scenario: strong labour market without wage inflation.
What followed was totally unexpected. The ISM Services PMI dived into contractionary territory for the first time since 2 and a half years. This is a leading indicator for the Services sector, which is about 80% of the US economy. The market rallied even more on hopes that the Fed would stop rate hikes very soon and start cutting rates earlier.
The market may be underestimating the Fed’s resolve in keeping conditions tight for longer.
In fact, Fed speakers doubled down on their intention of keeping rates higher for longer after the reports as their focus is more on the labour market now and they want to see unemployment picking up before having the confidence in easing monetary conditions.
If that doesn’t happen (which is unlikely), they will probably keep at it until they see the CPI/PCE Y/Y near their 2% target. In that case though, it would be too late.
S&P500 Technical Analysis
Daily chart of the S&P500.
On the daily chart above, we can that the price came back to the old support in the 3920-3940 area that now acts as resistance. If the price manages to break that zone, buyers will be in control and target the blue trendline or even a breakout higher.
If the price gets rejected from that zone, sellers will regain control and target at least the support at 3800 if not even lower to the October low at 3506.
Zooming in to the 1-hour chart, we can see the rangebound market of the past few weeks. The support is in the 3790-3810 area and the resistance is in the 3920-3940 area. We can also see more clearly the two possible scenarios:
· Break above and run to the trendline in the 4000 price zone.
· Fail and fall back to the support in the 3800 price zone.
On the 5-minutes chart, we can see that the buying momentum out of the two economic reports is waning as depicted by the divergence with the RSI. This may give a higher probability for the 2nd scenario to play out as the price may not have enough strength to break up.
