Hopes of Fed pivot die down
The latest NFP reading confirms what dovish hopefuls were dreading: the US labour market remains very tight. Unemployment has dipped back to 3.5% after climbing to 3.7% in July, as the Us economy added another 263 thousand jobs in September. Market sentiment at the beginning of the week had picked up as the latest job vacancy data suggested that maybe the labour market had started to turn and the Federal reserve would eventually pivot sometime in the next two months. This feeling was also aided by the smaller-than-expected hike from the RBA on Tuesday.
But the ADP reading on Wednesday served to dampen those hopes of a pivot in Fed policy as the number came in higher than expected, not by much, but enough to weigh on the already weak arguments for loser policy. Risk sentiment weakened once again and the US dollar advanced alongside us treasury yields.
The better-than-expected unemployment data (albeit with a falling participation rate) has shifted rate expectations further in favour of another 75bps hike in November, from 83% prior to the data release to 90% as of the time of writing. The Fed funds rate futures is now suggesting peak rates of 4.64% in March as the Fed has further justification to continue tightening. The next data point on the radar is the September US CPI out on Thursday next week, with consensus estimates of 8.1% from 8.3% in August. It is unlikely this is going to affect the Fed’s mandate, even if the reading undershoots expectations slightly (a big outlier would be needed for that) but traders will be paying attention nonetheless.
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S&P 500 forecast next week
The performance of the S&P 500 (US 500) is directly correlated to the level of liquidity in the US economy, which is inversely correlated to the unemployment rate. Given the current levels of persistently high inflation and a labour market that remains tight, the Fed has no reason to start loosening monetary policy – in fact, quite the contrary is still applicable – and so the liquidity levels will continue to drop as the Fed tightens financing conditions.
Because of this, the S&P 500, alongside other major US indices, is likely to remain subdued in the next few months until the economic landscape shifts and forces the Fed to change course. The short-term picture is also pretty bearish, with this week’s bullish reversal seen as a bear market rally and some repositioning given the momentary shift in expectations. Last week’s low (3563) will be a good gauge as to whether the bearish bias has resumed, at which point the path is pretty clear for a retracement back to 3400 where we saw some support back in October 2020.
S&P 500 Daily Chart
DAX 40 forecast next week
There is hardly any data out in the Eurozone or Germany next week, or any key events, so the DAX (DE 40) is likely to move in line with overall market sentiment, which means the bearish trend will likely continue. The German index has been tracking either side of the descending trendline since it broke away from its key area of support (15000 – 14813) back in February, using the trendline as the midpoint.
Following this pattern, we may see the DAX bounce off the line a few times over the coming days before a bearish break is achieved, meaning the range between 11780 and 11730 is a good area of upcoming support.
DAX 40 Daily Chart
FTSE 100 forecast next week
It is a heavy week for data in the UK next week, with a focus on growth and the labour market. The outlook is likely to remain supportive of further rate hikes from the Bank of England, of which we will see a few members speaking next week, with Governor Bailey in focus on Tuesday. Markets will likely be focused on his commentary after the bank had to step in to calm the bond market following the fiscal stimulus unveiled by the UK government.
The FTSE 100 (UK 100) has remained resilient throughout the consumer confidence meltdown in the UK, including the sovereign credit rating downgrades seen this week. The UK index has managed to move in line with overall risk-on sentiment despite its domestic turmoil, evidencing that it is still outperforming its peers on the year so far. The 6823 – 6755 range is still a good area for support, although we may see more immediate buying action around 6895.
FTSE Daily Chart
Read More: S&P 500, DAX 40, FTSE 100 weekly forecast