Weekly Focus: Stock Markets Need Inflation to Slow Down

The release of the Non-Farm Payrolls report last Friday provided markets with an unpleasant surprise as 528,000 new jobs were created in the U.S. economy in July. This a very big number for a single summer month. Such figures were seen in the summer of 2021 too, but the unemployment level was 5.8-5.9% then, way above the current 3.5%. The situation in the American economy was also different concerning the large growth of GDP compared to a technical recession currently being witnessed in 2022.

A strong labour market indicates a highly likely interest rate hike by the Federal Reserve (Fed). Consequently, another 75-basis points interest rate hike is seen to be justified.

The S&P 500 broad market index dropped by 1.0% just after the labour market report came out, but later rolled back to establish an overall daily decline of0.2%. Such a small decline may indicate that investors are likely to continue the summer rally.

The next milestone that investors are waiting for is the July Consumer price index (CPI) to be released this Wednesday. The forecast is looking good as prices are suggested to decline to 8.7% from 9.1% a month before. A small step down, but a very important one. This slow-down of inflation could be enough to push the S&P 500 index above the 200-day average that is currently running at 4179 points. The rise of the index to 4250-4300 points may become an attractive opportunity to open short positions that could remain open until the end of November or even until the end of this year.

The oil market situation is still very complicated at the moment as Brent crude prices landed at the $97 per barrel support level. International Energy Agency (IEA) and Organisation of Petroleum Exporting Countries (OPEC) will deliver their monthly reports on oil market developments somewhere in the middle of the month. If Brent crude prices continue to fall substantially below current levels, the upside scenario with a primary target at $135-145 per barrel and extreme secondary targets at $160-170 per barrel would need to be revised. On the other hand, if prices go above current levels, the best entry points to join the rally may be seen now.

Gold prices rolled back to $1764 per troy ounce after a strong Non-Farm Payrolls report. However, the bullion prices are still on the upside track as they returned to $1778 per ounce at the beginning of the new week. So, the rise to the $1800-1820 per ounce level is possible, but it is very risky to open long positions at this level. So, it is better to wait for gold prices to hit this area or go above to open long-term short positions in September with targets at $1350-1450 by the end of October.

EURUSD has slowed down and is now seen to have a resistance level at 1.02000-1.02200. The nearest support level at 1.00900-1.01100 is seen to be an attractive level to open small long positions.

GBPUSD is struggling to continue to the upside. If this Tuesday the pair closes below 1.20900-1.21000 it will signal a possible big correction to 1.20000 and even further down to 1.19000. So, if this scenario does come into force, a small short position could be opened at 1.20900-1.21000 with the first target at 1.20000.