What’s Happening?

US nonfarm payrolls are due this Friday which could have a significant impact on US interest rate speculation and trading in US stocks for the coming weeks. This arrives at a time that a big technical turning point may be approaching as well with the US 30 near the top of a big sideways trend that has been in place for over a year.  

 

Technicals:

 

For over a year, the US 30 has been trending sideways in a wide range between 15,540 and 18,150.  The index staged a strong run out of a double bottom base but last levelled off again lately. Since April, the index has been mainly trading between 17,380 and 18.150.

 

Over this time, RSI have been trending lower out of a negative divergence indicating slowing upward momentum and a pending downturn. In late June, the US 30 completed a double top near 18,150 and has started to retreat with resistance falling toward the 18,000 round number. Next support appears possible at the 50-day average near 17,745 then a prior low near 17,650. We already had one crack in support down toward 17,000, a second one would suggest a deeper downswing may be starting.

 

 

Fundamentals:

 

For the most part, the US economy appears to have been growing moderately through the first half of the year, especially the consumer side, while core inflation has held up reasonably well.

 

Last month’s weak nonfarm payrolls report came as a big surprise to traders as there were no prior signals from ADP payrolls or jobless claims but of which indicated a robust US job market (and jobless claims have continued to do so since).

 

This suggests weak nonfarm payrolls could have been due to one of three factors. One, the data was wrong and we could be heading for a big headline print this month and/or a big upward revision to last month. Two, the reason job growth is slowing is because the US is nearing full employment, which the drop in the unemployment rate to 4.7% suggests. Three, weak job growth reflects a slowing US economy.

 

Thursday’s ADP and Friday’s nonfarm payrolls reports may give a better idea of which one of these scenarios is most correct. One or two would suggest a strong US economy which could send stocks higher again. Door number three would suggest a weakening economy or stronger impact of Brexit than thought which could drag on stocks.

 

Speculation on what the data means for the Fed (one and two would be hawkish, three would be dovish) could spark liquidity trading as well so we could see snap swings in both directions in the minutes following the announcement.

 

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