Wall Street: what next after markets fail to stay afloat despite cooler PCE inflation?

US stock markets fell on Friday night despite cooler personal consumption expenditure (PCE) inflation, due to political uncertainty following the first US presidential debate and month-end/quarter-end rebalancing flows.

Impressive performance over first half of 2024

Friday night's price action ruled off an impressive six months for the first half of 2024. The Nasdaq surged 16.98%, the S&P 500 added 14.48%, and the Dow Jones added 1,429 points or 3.79%. Last week, a 2.56% gain by the Japanese stock market saw the Nikkei finish the first half of the year up 18.28%, although, in US dollar terms, the actual number was a more sedate 4.08%.

Deceleration in inflation provides confidence for rate cuts

Returning to Friday night's inflation update, the May PCE inflation report confirmed a deceleration in inflation, increasing confidence that the Fed can begin cutting rates in September. Headline PCE increased 2.6% year-on-year (YoY) in May from 2.7% prior. Core PCE eased to 2.6% YoY from 2.8% prior. The US rates market starts the week pricing in 17 basis points (bp) of rate cuts for September and 48 bp before year-end.

Key events for US equity markets this week

This week, the key events for US equity markets are a speech by Fed Chair Powell, the FOMC meeting minutes, Institute for Supply Management (ISM) manufacturing and services Purchasing Managers' Indexes (PMIs), and Non-farm Payrolls (NFP). In the lead-up to Friday's NFP report, initial jobless claims recently hit a 10-month high of 243,000, while continuing claims last week rose to their highest since November 2021, pointing to further cooling in the labour market.

What is expected from Non-farm payrolls

Date: Friday, 5 July at 4.00 am AEST

In May, the US economy added 272,000 jobs, the most in five months, rebounding from a downwardly revised 165,000 in April and exceeding forecasts of an increase of 185,000.

Providing some offset to the hot establishment survey, the household survey was soft, with the unemployment rate increasing 0.1 percentage points (pp) to 4.0%, driven by a 408,000 decrease in household employment. All the decline in household employment and the increase in the unemployment rate were accounted for by workers under 25 years old. The participation rate fell to 62.5% from 62.7%.

Cooling labour market indicators and preliminary expectation for June NFP

In the lead-up to next week's NFP report, initial jobless claims recently hit a 10-month high of 243,000, while continuing claims this week rose by 18,000 to 1,839,000, the highest since November 2021, adding evidence to cooling in the labour market.

This month, the preliminary expectation is for the US economy to add 165,000 jobs and for the unemployment rate to remain stable at 4.0%. The participation rate is expected to rebound to 62.7%, and average hourly earnings are expected to fall to 3.6% YoY from 4.1% YoY prior.

US unemployment rate chart

S&P 500 technical analysis

Last week, the S&P 500 pushed to a new record high before finishing the week in negative territory as it continued its battle with trend channel resistance and bearish divergence evident on the Relative Strength Index (RSI) indicator. In the process, it formed a second consecutive 'loss of momentum/potential reversal' weekly candle.

While the S&P 500 remains below resistance at 5,500/25, there is room for a pullback initially towards the April highs of 5260. A break of support at 5440 and then at 5400 would increase confidence that a pullback is underway. A sustained move above 5500/25 would voice the call for a pullback and indicate the uptrend has resumed.

S&P 500 weekly chart

Nasdaq 100 technical analysis

The Nasdaq 100's rally from the May 18,189 low took the index into overbought territory and up against trend channel resistance near 20,000. This occurred prior to the Nasdaq 100 forming a second consecutive ‘loss of momentum/potential reversal’ weekly candle last week.

While the Nasdaq 100 remains below resistance at about 20,000, there is room for a pullback initially towards uptrend support at 19,000.

Be aware that a sustained move above 20,000 indicates the uptrend has resumed.

Nasdaq 100 weekly chart

• _{Source: TradingView. The figures stated are as of 1 July 2024. 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.}