Wall Street Wobbles: Navigating uncharted volatility

US equity markets concluded the week on a shaky note, troubled by escalating volatility in the bond market and a liquidity drain of an aggregate -$687.2bn last week from central banks.

Market volatility amid central bank concerns

The declines occurred despite a softer-than-expected non-farm payroll figure as the US economy added 209k jobs last month, missing forecasts of 225k.

Although the economy added the fewest jobs since December 2020, the cooling wasn't sufficient to halt the unemployment rate falling back to 3.6% from 3.7% in May. It also failed to prevent average hourly earnings from rising by 0.4% in June, leading the annual rate to increase to 4.4% versus 4.2% expected.

Payroll and unemployment figures: An overview

The pivotal events for this week will be US inflation data on Wednesday night, previewed below. Keep an eye out for Federal Reserve speakers, including Daly, Mester, Bostic, and Kashkari, who will be active before the Fed's blackout period begins the following week.

Q2 earnings season commences on Friday with reports from JPMorgan, Citigroup, and Wells Fargo.

A peek into the week: Inflation data and Fed talks

CPI

Last month, headline CPI eased to 4% from 4.9% in April, driven by a decline in energy prices. Core CPI, which excludes volatile items such as food and energy, eased to a one and a half year low of 5.3% from 5.5% in April.

This month US headline and core CPI are both forecast to rise by 0.3%. This would see the headline rate fall to 3.1% YoY from 4% in May, with base effects and declines in energy and food prices playing leading roles in the deceleration.

Inflation

Core inflation is expected to fall to 5.0% YoY from 5.3% in May. Shelter inflation is expected to continue its downward trajectory, as are airfares and medical inflation, following a reset in health insurance inflation in October last year.

While inflation has likely peaked, core inflation remains sticky, and the Fed will want to see more confirmation that a downside progression is continuing to be made on core inflation to ease market fears of further tightening.

S&P 500 technical analysis

At the start of last week, our view was that seasonal strength in July would see the S&P 500 and other US indices extend their gains. However, by Friday morning, as noted on Twitter, we had changed our tune based on "the rally in yields and the possibility of a double top at 4500ish in the S&P 500."

While below 4500, we expect last week's pullback to extend towards 4368. Should the S&P 500 see a sustained break below 4368, the next layer of support is not until 4300.

Be aware that a sustained break above 4500 indicates the uptrend has resumed towards 4600/4630.

S&P 500 daily chart

Nasdaq technical analysis

The sharp rally in bond yields last week undercut support for the Nasdaq, leaving a potential double top in place at 15,475ish.

While the Nasdaq remains below 15,475, we expect last week's pullback to extend towards 14,853. Should the Nasdaq see a sustained break below 14,850, the next layer of support is not until 14,500.

Be aware that a sustained break above 15,475 indicates the uptrend has resumed towards 16,000.

Nasdaq daily chart

Dow Jones technical analysis

The Dow Jones chart is strewn with several highs this year between 34,250 and 34,600, each a failed attempt to break above the December 34,712 high.

After its latest failure last week at the 34,465 high, risks to the downside are mounting. Should the Dow Jones break below support at 33,600/50, it will likely see the decline extend towards the 200-day moving average, currently at 32,976. This level needs to hold to avoid a deeper pullback towards the May 32,586 low with the possibility to the banking crisis March 31,429 low.

Dow Jones daily chart

• _{TradingView: the figures stated are as of July 10, 2023. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.}