SPX500 Cautious Ahead of US NFPs, as a Volatile Week Draws to a Close

Market Reaction to Economic Data

Wall Street returned from the long weekend with losses, but staged a solid rebound on Thursday, running a mixed and volatile week. Markets were all-over the place, as they digested many - mostly second-tier - economic releases.

It seemed like we were in a Bizarro World where bad news is good news for the stock market and vice-versa, due to their implications for the Fed's tightening path.

US Factory Orders grew by a measly 0.3% in April month-over-month from 1.8% prior (revised), while the ADP report showed that the private sector added just 128,000 jobs in May.

This marks a significant slowdown from the 202,000 that had been created in the previous month (revised down from 247K) and a miss from the 300K expected, with small businesses struggling, as they reduced payrolls by 91,000.

SPX500 surged yesterday in spite of the poor economic data (and also looked past Microsoft's lower forward guidance), perhaps because these may make the Federal Reserve more conservative and less hawkish.

US Fed Hawkish Rhetoric

The central bank is on a front-loaded tightening path and has hinted at more 50 basis point rate hikes over the next two meetings, trying to cool the labor market and the economy, in order to bring surging inflation down. The question is whether it can do that without sparking a spike in unemployment and an economic recession, i.e. achieving a soft landing.

However, officials seem to be trying to reassert the bank's hawkishness and its resolve to fight inflation recently and they do not appear to be overly concerned with some poor economic figures.

On Monday, Governor Waller had offered glimpse of the intentions past July, saying that he supports half-percentage rate hikes for "several meetings", while attributing the GDP contraction in Q1 to factors that he does not expect to be repeated. ^[1]

More to it, Vice-Chair Ms Brainard said on a CNBC interview on Thursday, that "Right now, it's very hard to see the case for a pause," in rate hikes, as officials have "still got lot of work to do" to bring inflation down. She also noted that "some cooling of a very very strong economy over time" is to be expected. ^[2]

SPX500 Analysis

The index had posted its worst day in 2+ years a few weeks back, but avoided a bear market and has since posted a noteworthy recovery, which covers the 38.2% Fibonacci of the March High/May Low drop.

This brings the descending trendline from the aforementioned high (at around 4,250) in its crosshairs, but it will need fresh impetus in order to surpass it and push for 76.4% Fibonacci (4,444).

Despite the rebound, SPX500 is not out of the woods yet and there is risk for a return below the EMA200 (4,080-70), which would expose it to 4,000, but 3,874 does not look easy at this stage.

Caution is required because of today's US jobs report, which can spur volatility, produce outsized moves and determine the SPX500 trajectory.