Weekly Summary: Non-Farm Will Get the Market in Order

This week ends with a small amount of havoc as the S&P 500 broad market index lost 4% to 3888 points, while Brent crude prices dropped by 6% to $81 per barrel. There are more signals the meltdown may continue if the Non-Farm Payrolls data will not restore hopes for a possible slowdown of interest rate hikes by the Federal Reserve (Fed).

The Chairman of the Fed, Jerome Powell, has flagged this havoc during his testimony before Congress after he flipped out the idea of being "prepared to increase the pace of rate hikes” to bring the inflation under control. Investors were thrown completely into dismay as such rhetoric came as a very unexpected surprise. Stock indexes plunged down while the U.S. Dollar surged along with the U.S. shot-term bond yields. The yield curve inversion between the 10-year Treasuries and 2-year Treasuries went sky high to the levels of the early 1980s. Investors immediately reconsidered the ceiling for Fed rates this year to 5.7% from 5.1%. According to FedWatch tool investors expect the Fed to raise interest rates by 0.50 percentage points in March instead of the previously expected 0.25 p.p.

The following day Mr. Powel tried to justify himself by saying that the interest rate hike pace is uncertain and would largely depend on incoming labour market data for February, along with the inflation level for the previous month. So, there are some chances for a market recovery if the upcoming data does support this idea. The consensus suggests the American economy added 205,000 new jobs during February, bringing  the unemployment level to a record low of 3.4%. Our statistical modeling suggests 240,000-260,000 new jobs were added during the previous month, considering rather neutral dynamics of initial jobless claims. The unemployment level may reclaim the record low at 3.4% or retreat to 3.5%. These projections leave no room for the Fed to avoid further monetary tightening.

Technically, the S&P 500 index continues to move within a downside formation with targets at 3650-3750 points. The index is below the strong support level of 3970-3990. This opens the window for a steep decline towards 3650-3750 points.

Oil market prices dropped significantly to the low margin of the wide trading range of $79-89 per barrel of the Brent crude benchmark. This time prices are ready to go deep down once they breakthrough the support level of $79 per barrel. Recession logic suggests that prices may decline towards $40-60 per barrel.

Gold prices are moving inside the mid-term, upside formation with targets at $2000-2100 per troy ounce by the middle of 2023. Prices returned close to the support level of $1790-1810 per ounce. If prices pass this support level and continue down in case of an unfavorable Non-Farm Payrolls data, then the downside scenario may become a reality. In this case, prices may rewrite last year’s lows of $1600-1650 per ounce.

The U.S. Dollar is likely to continue strengthening, but it will largely depend on incoming labour and inflation data. In case of a strong labour market, the Dollar may soar dramatically. Considering the high volatility in the market, it is better to place orders attached to longer perspectives. Short trades for EURUSD opened at 1.06700-1.07200 with a downside target at 5000 points below the opening level and the same 5000 points for a stop-loss order should be considered very attractive. The decline of the EURUSD to 1.05000-1.05500 could be used to close half of the trade, and the other half should be continued until the targets of 1.03000-1.03500 are met.