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  • Weekly Focus: Inflation and Banking Sector Reporting in the U.S.

Weekly Focus: Inflation and Banking Sector Reporting in the U.S.

The Labour Market report for June that was released last week came as a real surprise. The Non-Farm Payrolls was at 209,000, lower than expected 225,000, while unemployment level dropped to 3.6% from 3.7%, in line with expectations.

The number of new jobs created by the U.S. economy in June at 209,000 is still strong, and it had little disappointing effect on the overall strong Labour market report. But, a slowdown in Non-Farm Payrolls demonstrated that expectations were largely exaggerated. This fact pushed down 2-year Treasuries’ yield, a most adequate gauge for Federal Reserve (Fed) interest rates moves. The U.S. Dollar dropped by 0.7%.

Investors are seeking a recovery for these assets as the 2-year Treasuries’ yields, while they are still sitting at 4.91%. The Greenback is struggling as the U.S. Dollar index is seen rising by a 0.1% on Monday. This demonstrates a belief that nothing has changed in the investor’s expectations that the Fed will increase interest rates in July one more time before the interest rate hike cycle will end.

The most intriguing is the fact that the inversion of the debt yield curve is at the highest level since 1981. The contraction of this inversion and a possible end of the interest rates increase period could be far more dangerous, as this combination usually leads to the recession and deteriorating stock indexes. The logic “the worse is the data the better is for the market” may simply doesn’t work anymore. Thus, the SYP 500 broad market index dropped by 0.2% on Friday despite a slightly weaker-than-expected Non-Farm Payrolls reading. The index continues to look to the downside, while hovering around 4400 points.

The U.S. Minister of Finance Janet Yellen, who are mostly an optimist, refused to rule out the recession possibility saying that it is “not completely off the table”. “We have a healthy economy, a great labour market, inflation too high and a concern of ours and the American people, but coming down over time,” Yellen said. “And it’s my hope that, and belief, that there is a path to bring inflation down in the context of a healthy labour market. And the data that I’ve seen suggests we’re on that path.”

This week June inflation data in the United States will be released. The expected slowdown to 3.1% YoY from 4.1% YoY in a previous month should be viewed as a positive development, but if the assumption that a contraction of the inversion of the yield curve is correct than such a rapid decline in inflation may lead to a drop of stocks’ prices.

The same might be true for the Q2 2023 corporate reporting. This week JPMorgan, Chase, Wells Fargo and Citi will open a reporting season amid negative expectations. FactSet, which is tracking the corporate performance and provide market analysis, expect that S&P 500 listed companies will lose 7.2% YoY of their profit, the largest contraction since Q2 2020. So, a weak data this time may have a negative effect on the stock indexes.

Technically, the S&P 500 index continues to have an upside formation with targets at 4250-4350 points, that have already been met. The market bounced from the resistance at 4440-4460 points, and has almost reached the support at 4340-4360 points. If this support would surrender the formation will change to the downside, which is seen very tempting amid emerging downside signal.

Brent crude prices are gravitating to the resistance at $76-78 per barrel as hopes rise that Saudi Arabia and Russia will continue to cut oil exports. Once the support would be broken, recession scenario chances will become very high. Its targets are at $40-60 per barrel of Brent crude.

Gold prices are moving inside the mid-term upside formation with targets at $2000-2100 per troy ounce that have already been met. But the situation has changed dramatically as the important support level of $1980-2000 per ounce was smashed. Short positions were opened after prices tested the $1970-1980 former support level with targets at $1890-1910 per ounce. The first half of this trade was closed at $1910 per ounce, while the second half was left open with the stop-loss order moving to $1980 to avoid any losses, and amid expectations of some extra profit. When prices would pass the $1900 per ounce level this downside scenario will be activated.

The Greenback fell a victim off exaggerated expectations when the Labour market report was released on June 7. Still, the American currency is strengthening compared to its peers. It has chances to continue rallying for a while. But it is too risky to go long on the Greenback at the moment. It would be better to wait for a decline of the EURUSD below 1.06000 to seek out sell opportunities for the Greenback.

Two major positions were opened for July. First, is a short position for the EURUSD at 1.08900-1.09200 with the take profit and stop loss both set at 5000 points from the opening price. A long trade for the AUDUSD was opened from 0.66400-066600 with the same size of the stop loss and take profit orders as for the EURUSD. Two operations balance each other and should be kept to mitigate risks.