The S&P 500 broad market index dropped 2.5% to 4480 last week as investors were digesting U.S. labour market report for July. This data is mixed as unemployment level was down to 3.5% from 3.6% in June, while Non-Farm Payrolls were at 187,000 missing expectations at 200,000.
It seems that U.S. labour market is cooling very slow, as wages continue to rise at the same pace. The American economy is strong despite rising borrowing costs, and inflation continue to be high. Thus, U.S. Federal Reserve (Fed) Governor Michelle Bowman said the Fed likely need to raise interest rates further to bring down inflation. The stock market may not survive current high interest rates by September. So, another interest rates hike might be not needed, and cooling down of the U.S. economy might be accelerated by itself.
Investors are waiting for the inflation number for July to be released this week to asses a possible further interest rates hike. The consensus is not good as experts estimate CPI in July to rise by 3.3% YoY, ahead of 3.3% in June. This acceleration may be largely attributed to 15% rise of crude prices in July. U.S. debt market is the first to monitor in this regard. If the yield curve inversion between 10-year and 2-year Treasuries continues to disappear it may signal a stress for the stock market. The downgrade of the United States sovereign rating by Fitch accelerated 10-year Treasuries yields up. This is rather unusual way to normalise the yield curve, as in normal circumstances it is 2-year bonds yields that should go down first after the Fed lowers its interest rates.
If the inflation would be rising the yields on 2-year Treasuries could go up, as investors will bet on another interest rates hike by the Fed in a short run, while in a long period inflation will slow down anyway. From this point of view, high interest rates may stabilize the stock market. This is not a primary scenario, but it is worth to be considered waiting for the inflation data to be released this Thursday.
Technically, the S&P 500 index continues to have an upside formation with targets at 4250-4350 points, that have already been met. The benchmark dive below the support at 4560-4580 points, and is heading towards 4440-4460. The downside signal has been finally shaped with a short trade initiated at 4520 points.
Brent crude prices hit the resistance at $86.00-88.00 per barrel, and are trying to form a correction pattern. The support is located at $76-78 per barrel. Prices may slip below $76 per barrel initiating a recession scenario with targets at $67-69 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. The nearest support is set at $1900-1920 per ounce. However, the similar scenario of August 2011 signals that this support will be very hard to breakthrough.
The Greenback has rolled back, still looking solid compared to its major peers. A sharp correction of the American currency could be expected in August. If such a correction would emerge, good buy opportunities for the Dollar should appear. But before then, a risky long trade with a small amount is seen for GBPUSD from 1.27200-1.27400 with a target at 1.29400-1.29600, and a stop-loss at 1.26000. If the trade will be successful, a further weakening of the Greenback could be expected. It would be better to wait for a decline of the EURUSD below 1.05000 to seek out sell opportunities for the Greenback in this regard.