SPX500_m skittish ahead of NFP

With US stock markets closed tomorrow (Friday, April 7^th), traders and investors have to wait until next week before offering their full reaction to the US March nonfarm payrolls report due on Good Friday.

Still, that hasn’t stopped the blue-chip US equity index from reacting to the data surrounding the US jobs market already released so far this week:

• JOLTS job openings: 9.9 million (lower than the forecasted 10.5 million figure)
• ADP employment change: 145,000 (lower than the forecasted 210k number)

Beyond the labour market, even the March ISM manufacturing data and February’s US factory orders, both also already released earlier this week, came in lower than forecasted.

All of the above data suggest that the world’s largest economy is starting to strain under the weight of the Fed’s 475 basis points in rate hikes delivered over the past 12 months.

However, the prospects of a US recession isn’t exactly cause for rejoicing for risk assets, prompting the S&P 500 to peel away from its recent cycle high and moderate back below the 4100 line, at the time of writing.

What are market forecasts for Friday’s US March NFP?

• Headline figure: 235,000 jobs added in the US economy in March
   
• Unemployment rate: 3.6%
   
• Average m/m hourly earnings: 0.3% compared to February 2023
  (higher than February’s 0.2% month-on-month advance)
   
• Average y/y hourly earnings: 4.3% compared to March 2022
  (slower than February’s 4.6% year-on-year advance)

 

But first, look out for US weekly jobless claims later today (Thursday, April 6^th), with forecasts now expecting a print of 200,000.

More-than-expected applications for unemployment insurance would presumably lead to a move higher for US equities on the basis that the Fed can let up on its hikes.

However, as mentioned earlier, in light of the relatively downcast reactions to the JOLTs and ADP data we well as contracting US factory activity, markets may choose to remain reserved, before letting loose next week in the wake of Friday’s NFP.

 

“Bad news” is “good news” for risk assets?

Overall, the overarching theme appears to be this: further evidence of a cooling economy would be a risk-on narrative for stock markets.

The above would be based on the notion that a weaker US labour market should allow the Fed to soon pause its rate hikes before eventually pivoting to rate cuts later this year.

And indeed, markets are predicting as such:

• At the time of writing, the Fed Funds Futures now assign a 43% chance of a 25-bps hike at the FOMC meeting in May.
   
• Looking further out, markets are fully pricing in a Fed rate cut by September, with a 50% chance of the cut being 50-basis points.

 

As long as market bets for the Fed’s eventual dovish pivot remain intact, that should help keep the S&P 500 supported, noting that this index is primarily led by US tech stocks that are relishing the thought of a Feed rate cut being on the horizon.

 

From a technical perspective …

Stock market bulls will be looking to overcome the initial resistance around this week’s cycle high at 4146.9.

That’s close to the 50% Fibonacci level from the S&P 500’s 2022 drop from its all-time high registered in January, down to its October trough, which resides at 4156.3.

Note that this 50% Fib retracement level has thwarted stock bulls on multiple episodes since June 2022.

Above that 50% Fib retracement level, the February peaks just shy of 4,200 lay in wait, ready to resist stock bulls.

To the downside … the cycle high from two weeks ago around 4044 may offer initial resistance, followed by its 50-day simple moving average (SMA).

Failing which, in the event of another blockbuster US jobs report, that may set the S&P 500 on a path towards revisiting the psychologically-important 4,000 mark.