Last week ended with a big surprise after the Personal Consumer Expenditure Index (PCE) dropped sharply to 3.8% in June against 4.6% in May. This pushed the S&P 500 broad market index up by 1.2% to 4453, and provoked the largest intraday spike since April 2022 of 1.5%.
Surprisingly, a sharp drop in inflation has not changed investors’ perception of the monetary policy of the Federal Reserve (Fed). The probability of increases in interest rates should go lower considering this drop, but investors still expect another interest rate hike by the Fed this month and a decrease of the rates in May 2024. The debt market is even more puzzling as the interest rate curve inversion is increasing. The yields for 2-year Treasuries rose to 4.95% from 4.90% over the weekend.
So, a divergence of the stock and debt market is increasing despite lower PCE. This is a fundamental difference as large institutions are expecting troubles in the economy and in the financial market, according to rising inversion. The stock market, which is largely populated by retail investors, is surging as they are betting on a booming economy and stocks amid lower inflation. Following the institution is usually the safest way to go. But the market could be overheated much longer than investors have money to support the rally. So, it is better to keep short positions for the U.S. stock market open.
This week two major events are expected. The first is the publication of the Federal Open Market Committee (FOMC) Minutes from its June meeting, when the Fed’s Chairman, Jerome Powell, insisted on two more interest rate hikes in 2023. The second is the publication of the U.S. Labour Market Report for June that could keep the Fed singing with the same hawkish tunes. These events will be accompanied by the reversal opportunities for the S&P 500 index that are emerging this week, and also by mixed signals from the currency market that could indicate to a possible short for EURUSD and a possible long for AUDUSD. This combination could bring about a well-balanced position during this July.
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 has tried to return to the support at 4340-4360 points, and was resting in this area on Monday. So, good reversal conditions have been formed but without particular downside at the moment.
Brent crude prices have failed to test the support at $67-69 per barrel and bounced back towards the resistance at $76-78 per barrel. Once the support is 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 pass the $1900 per ounce level, this downside scenario will be activated.
The currency market became very volatile after PCE numbers publication in the U.S. The Greenback has strong chances to continue strengthening 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 have been opened for July. The first is a short position for the EURUSD at 1.08900-1.09200 with the take profit and stop loss orders both set at 5000 points from the opening price. The second is a long trade for the AUDUSD, which has been opened from 0.66400-066600 with the same size of the stop loss and take profit orders as for the EURUSD.