Jobs Data and Real Yield
The jobs data on Friday has affected the real yield and this, in turn, has filtered through to other instruments. The non-farm employment change printed at 150K, which was lower than the 178K expected. Moreover, the previous print was revised lower to 297K. Average hourly earnings m/m were also lower than anticipated at 0.2% (0.3%), whilst the unemployment rate crept up to 3.9% from 3.8%.
In a previous article we detailed the failure swing on the real yield weekly chart, positing that it suggested that we were near the top of the Fed's hiking cycle. Then last week and following the weaker-than-expected jobs data on Friday, the real yield completed a reference candle reversal.
I.e., the candle from two weeks back charted the highest high in at least a three-candle cluster (blue arrow). The candles on either side had lower highs, and then last week's candle closed below the reference candle's low to complete the signal. This has reaffirmed the topping reference from the RSI's failure swing.
The Real Yield and USDOLLAR
FXCM's USDOLLAR basket is strongly correlated with the real yield. The correlation coefficient (bottom chart) between the two is a significant 70%. Therefore, it is no surprise that as the real yield (top chart) broke down, the USDOLLAR (middle chart) followed suit (red arrows).
* The USDOLLAR is taking its lead from the real rate.
* The weaker jobs data has taken pressure off the Federal Reserve and the market is discounting lower yields in response.
* As such, the USDOLLAR's green 5-day EMA has crossed below its orange 10-day EMA (black circle).
* This puts the EMAs into a bearish formation on the daily chart.
* The momentum-based RSI has dipped below 50 (blue rectangle), which is the bearish side of the indicator.
* The longer the RSI maintains below 50, the greater the downside momentum facing the greenback.
The Real Yield and SPX500
The SPX500 is negatively correlated with the real rate. The correlation coefficient (bottom chart) is a robust -65%. I.e., as the real rate declines (top chart), the SPX500 will be supported (middle chart). This is because higher index prices are associated with lower borrowing costs.
* The SPX500 is benefitting from the lower real yield.
* The weaker jobs data has transferred into a time value of money adjustment that is lifting the SPX500.
* Its green 5-day EMA has crossed above its orange 10-day EMA (black ellipse).
* This puts the EMAs into a bullish formation.
* The momentum-based RSI has popped above 50, which is the bullish side of the indicator.
* If it maintains above 50 (blue rectangle), an underlying bullish momentum will be supporting the SPX500, and it it will look to break above the down sloping black trendline.
* This will be a bullish development for the stock index.
FXCM's USDOLLAR basket and the SPX500 have correlations with the real rate. Moreover, the real rate has been affected by the weaker-than-anticipated jobs data and has declined. In turn, the respective correlations have seen the USDOLLAR and the SPX500 react. The USDOLLAR moves in line with the real yield. As such, it has dropped as the real yield has declined. On the other hand, the SPX500 moves opposite to the real yield, due to time value of money characteristics, and has appreciated with the real yield's fall.
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.