Yesterday’s flexible labor market conditions and continued services sector prices were not received well by Wall Street as overnight data called for a strong bias in Federal Reserve (Fed) policies. The big outperformance in the US ADP report (497,000 vs. 228,000 forecast) was followed up as strength continued in the services sector, with US ISM services PMI data coming in at its highest reading in four months (53.9 vs. 51 climate forecast). Strong demand for labor was also underpinned by renewed expansion in the services PMI employment index (53.1 vs. 49.9 expected).
Given that the Fed had previously expressed unease with services inflation, the continuation of services prices from the ISM data (54.1 vs. forecasts of 53.3) further challenged the pace of progress in inflation. The macro data sent US Treasury yields higher, as bets for a rate cut faced some pullback as recently as January-May next year. Notably, the US 10-year note has crossed 4% for the first time since March of this year.
While the ADP has not been a good indicator of US non-farm payrolls historically, some signs of labor market resilience still raise prospects for a stronger US jobs report today. Over the past year, the US jobs report has outperformed market expectations on 11 out of 12 occasions, with a marked acceleration seen over the past two months. Forecasts for June point to an increase of 200,000, with the unemployment rate unchanged at 3.7%. Another batch of better-than-expected readings could support hopes for a soft landing but could also pressure the Fed to do more, with an eye on the wage inflation number as well.
The S&P 500 has encountered some resistance at the upper trend line of an ascending channel pattern for now, with lower highs on the daily RSI indicating moderate bullish momentum. Near-term crowding sentiment may reverse with the fear and greed index returning to ‘extreme greed’ territory late last week, although seasonality in July remains favorable for the continuation of the uptrend, leaving any formation higher. low on observation. For now, more bearishness is likely to pave the way for the formation of a double top pattern, where 4330 is the crucial neckline for the bulls.
Source: IG Charts
Asian Open Championship
Asian stocks appear poised for a pessimistic open, with the Nikkei -0.45%, ASX -1.86% and KOSPI -1.02% at the time of writing, largely trailing negative delivery from Wall Street. The 3% decline in the Hang Seng in yesterday’s session appeared to reflect investor concern about a consumption-led recovery in China, which was further amplified by Goldman Sachs’ recent downgrade of major lenders and some concerns about the US-China relationship. The Hang Seng Greenland Banking Index fell more than 9% over the past week.
This morning the regional economic calendar saw a surprising jump in average cash earnings for Japan (2.5% vs. 0.7% expected) in May. With weak wage increases seen as the basis for “temporary” inflation by the Bank of Japan (BoJ), the recent pull in wage pressures appears to renew bets for a faster policy shift. However, the continued contraction in real wages for the 14th consecutive month and the sharp decline in household spending by more than expected (-4% vs. -2.4% expected) may invite some reservations.
USD/JPY has been consolidating around 145.00 recently, as it approaches the level prior to intervention by the Bank of Japan in September 2022. While a bearish crossover on the MACD and RSI from previous overbought levels indicates some exhaustion in the near term, it tends to The pair has tracked 10-year US-Japan differentials closely over the past year, with the recent rise in US 10-year yields to a four-month high likely to provide some support for the pair. The uptrend remains intact for the time being, with higher highs and higher lows forming since the beginning of the year, with any bounce that puts 142.50 in check as immediate support.
Source: IG Charts
On the watch list: US dollars / Canadian dollars Watched ahead of today’s US and Canada jobs report
After a brief breakdown of the 1.326 support level last month, USD/CAD has shown some resilience lately, gaining 1.2% over the past week. A slight inverted head and shoulder formation appears to be in place since mid-June this year, with a recent break above the neckline yesterday, likely to put 1.350 in check for any retest, as increasing RSI and MACD indicate bullish momentum building. .
Much will be determined by the jobs report released from the US and Canada later today. So far, policymakers on both sides have expressed unease with the recent resilience of the labor market, which warrants a hawkish tilt in their respective policy directives. Any divergence in labor market conditions will be in check, with any softer employment data likely translating into some weakness in its currency. For USD/CAD, any downside could leave level 1.326 back on the radar for near-term support, as there is uptrend line support.
Source: IG Charts
Thursday: DJIA -1.07%; S&P 500 -0.79%, NASDAQ -0.82%, DAX -2.57%, FTSE -2.17%