• Main
  • Analytics
  • Market Reviews
  • Weekly Focus: GDPNow, Inflation in China and Fed Officials

Weekly Focus: GDPNow, Inflation in China and Fed Officials

The S&P 500 broad market index futures are trading mostly unchanged at around 4952 points this week. The index posted a new all-time high at 4974 points last Friday despite a very strong U.S. labour market report for January.

The report revealed that unemployment remained unchanged at 3.7%, missing expectations of 3.8%. Average hourly earnings rose by 0.6% MoM, exceeding the anticipated 0.3% and the 0.4% reported in December 2023. Most surprising was the Nonfarm Payrolls, unexpectedly adding 353,000 new jobs against the expected 185,000. Additionally, December 2023 data was revised upward to 333,000 from 216,000.

These significant changes led to a decline in bets on interest rate cuts in March to 15.5%, down from 46.0% at the beginning of the last week and 76.0% a month ago, according to the CME FedWatch Tool. U.S. 10-year Treasuries yields surged to 4.10% from 3.81%, and the Dollar strengthened by 0.7%.

Considering these developments, the rally of the S&P 500 index appears somewhat irrational and potentially based on inertia. Investors have been withdrawing money from the SPDR S&P 500 ETF Trust (SPY) for the past five weeks out of the last six, reporting a $747 million outflow last week.

Federal Reserve (Fed) Chair Jerome Powell, in an interview with CBS’ “60 Minutes” over the weekend, reiterated points made during the January 31 press conference after the FOMC meeting. While this interview had a minor effect on the markets, it contributed to an overall pessimistic atmosphere.

This week's events, including the Reserve Bank of Australia's (RBA) monetary policy meeting, the Atlanta Fed's release of its GDPNow estimate for Q1 2024, and China's January inflation data, are unlikely to offset this sentiment.

The S&P 500 broad market index has surpassed the final upside target zone at 4850-4950 points, suggesting a correction window may open in mid-February. Consequently, betting on a rally before that could be risky. Reversal patterns should be anticipated, with the first already emerging, signaling a standard correction of 5-7% within the next two months. The starting point of this correction is yet to be defined.

Oil prices are stalling, failing to break through the resistance at $82.00-84.00 per barrel of Brent crude, and falling towards $72.00-74.00. The easing tensions in the Middle East amid peace talks between Israel and Palestine suggest that prices are likely to continue their descent.

Gold prices, having reached mid-term upside targets at $2000-2100 per troy ounce, are testing the support at $2010-2030 per ounce. De-escalation in the Middle East and rising Treasuries yields are weighing on prices, potentially leading them to $1920 if the support at $2010 per ounce is breached.

The U.S. Dollar has recovered all of its losses from last Friday and continues to strengthen. Expectations of another wave of the upcoming downside correction for the Dollar were diluted by strong labour market data. However, it remains risky to bet on both the rising and declining EURUSD. A return to the 1.11500-1.12500 area for the pair is likely, but a drop to 1.05000 should not be excluded.