Growth data points may weigh on SPX500

  • SPX500
    (${instrument.percentChange}%)


Source: www.tradingview.com

Over the course of this year, the 10-year real rate has charted a higher trough, suggesting support for yields. This may raise some eyebrows as the narrative surrounding rates has changed, which may, in turn, impact on the financial markets.

The first rate cut for the year was initially expected to be delivered at the Federal Reserve's March meeting. However, this was pushed back to May and then to June. Even the June meeting is in flux. The probabilities a month ago suggested a 70% chance of a cut in June, which have reduced to a current probability of 55%, according to the CME FedWatch Tool.

In other words, the narrative of "higher for longer" is still very much alive. Of course, higher rates imply a pressure on the economy, and a potential slower economy. Already we are starting to see data points reflecting a slowdown.

Last week the CPI and PPI suggested that the decline in inflation is slowing. Moreover, retail sales printed lower than expected at 0.6% m/m (0.8% m/m), with core retail sales (excludes automobiles) also missing forecast at 0.3% m/m (0.5% m/m). Then on Friday, the Empire State Manufacturing Index printed at -20.9, much lower than the -7.0 expected.

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If more data points continue to hint at a slowdown, it is likely to affect the SPX500. The index has typically priced in stable growth, moderating inflation, and yield cuts, with all three now experiencing headwinds to some degree.


Source: www.tradingview.com

These headwinds come at a time when the weekly SPX500 is overbought (green rectangle). Its RSI is above the 80 threshold and a normalisation is expected. This may come though a pause or a pullback. If the list of data points pointing to a slowdown grow, and given the overbought condition, a decent drop may result from the normalisation process. I.e. growth data is starting to become more important especially regarding any signals suggesting a loss of momentum.

Russell Shor

Senior Market Specialist

Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.

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