Weekly Focus: Inflation is no Longer a Threat for S&P 500

The new trading week has started with friction after the surprisingly very strong Non-Farm Payrolls report was published last Friday. Consensus expectations were at 150,000 new jobs created in January, while ADP reported a huge decline of 300,000 jobs, the biggest since May 2020. In reality, Non-Farm Payrolls came out at 467,000 in January with a revision of 350,000 newly added jobs in November and December 2021.

Such a strong U.S. labor market leaves the Federal Reserve (Fed) no other choices but to act with utter severity during its March meeting. Investors are debating about an increase of the interest rates from 0.25% to 0.75% at this meeting to tame inflation and inflation expectations. On one hand, it is a problem, as financial conditions would become severely worse in March. On the other hand, the market will receive a window of opportunities before the Fed meeting. This makes inflation data for January less important as the market understands that in such circumstances prices must rise. So, the reaction to the suggested 7.3% inflation in January could be contained. We may even see investors “sell on fears of high inflation and buy as high inflation is officially confirmed”.

Moreover, the market expects strong corporate reports this week with Disney, Uber, Pfizer, and Coca-Cola expected to beat expectations. And if so, we may see a neutral or even positive mood in the market. The technical picture suggests that stock indexes could edge higher this week. An upward trend for the S&P 500 broad market index with a target of 4650-4700 points is likely to continue as the index is expected to be above the support level at 4480-4510 points by Wednesday. This would signal to further hold buy positions.

The oil market continues to run on the upside track as Brent crude prices claimed the upside “$100” per barrel scenario. The recent pull back to $90.70-91.50 should be considered as a correction with a possible rebound to $94.50-95.00 per barrel. Some speculative buy positions with a stop below $90 per barrel might be interesting to consider. The United States is strengthening  its efforts to bring oil from Iran back to the global market, but it is highly unlikely that it would ruin the “$100” scenario for Brent crude. So, any news in the oil market should filter out  this scenario in order to seek a correction with a following upside rebound, while keeping in mind this three-digit target.

Gold prices continue to swing above the $1800 per troy ounce landmark. But this time they a carefully nudged above the $1820 level to avoid any slip ups towards the nearest support level which is still at $1750 per ounce. The yields for 10-year U.S. Treasuries rose above 1.95%, the highest since November 2019. With such concerns in the market, gold prices are likely to remain on the upside track within the $1800-1840 trading range by the end of February.

The EURUSD pair continues to run on the upside track with the target at 1.14500-1.15500 by the end of February. So, any buy trades could be opened with this short-term target at 1.14500.

GBPUSD is also on the upside march to 1.35500-1.36000, but it almost ran out of steam by Tuesday afternoon. But we always should keep in mind that the Pound is much more volatile than the Euro and may reach even higher levels than expected in the beginning of the week.