Wall Street's wobbly August continues ahead of FOMC minutes

Despite a promising start to the week, the trajectory for US equities took an abrupt turn as treasury yields surged in response to a potent combination of factors. These included a UK employment update and a robust US retail sales report that stirred considerable market movements.

UK employment spark and wage paradox

The rally in yields ignited with the release of UK employment figures, showcasing a rise in the unemployment rate to 4.2%, marking its highest point since late June 2021. Paradoxically, amid this rise in joblessness, wage growth exhibited a remarkable fervour, elevating by 7.8% over the three months leading to July, up from a revised 7.5%.

These shifts spurred the UK rates market to rapidly factor in a complete 25 basis-point rate hike for the forthcoming September BoE meeting, and even priced in a 25% likelihood of a more substantial 50 basis-point hike.

US retail resilience and potential

Building upon this momentum, the surge in US yields gained further traction with July's robust retail sales report. The headline retail sales index saw an increase of 0.7% in comparison to the expected 0.4%, while the control group demonstrated an even stronger ascent of 1% versus the anticipated 0.5%. This commendable retail performance not only elevates the potential for upside risks to Q3 GDP forecasts but also followed in the wake of an earnings triumph from the retailing giant Home Depot.

Consumer resilience and yield dynamics

In this intricate interplay of data, it remains palpably clear that the American consumer remains a bedrock for the nation's economic health and a linchpin in shaping monetary policy. A sentiment resonating not only within the realm of financial metrics but reverberating across the actions of the US 10-year yields.

These yields ascended an additional 4 basis points overnight, accumulating a total ascent of 25 basis points in August. Remarkably, this places them merely 12 basis points shy of their zenith in October 2022, clocking in at an impressive 4.33%. This narrative is seamlessly echoed by the views of Fed President Kashkari, who, despite acknowledging some headway in inflation containment, affirmed that "it's still too high."

FOMC minutes and expectations

Thursday, August 17 at 4.00 am AEST

At its meeting at the end of July, the Fed, as expected, raised rates by 25 basis points to the range of 5.25% to 5.50%. The Fed's commitment to its tightening bias remained intact in the accompanying statement, highlighting its reliance on data-driven insights.

During the subsequent press conference led by the Fed Chair, more dovish undertones emerged, suggesting that the Fed views its rate hiking cycle as nearing its conclusion. The Fed Chair emphasised, "The federal funds rate is at a restrictive level now. So if we see inflation coming down credibly, sustainably, we don't need to be at a restrictive level any more. We can move back to it, to a neutral level and then below a neutral level at a certain point."

Anticipated in the forthcoming minutes is the reaffirmation of the Fed's softened tightening bias, emphasising its present reliance on data to guide policy decisions. These minutes are expected to echo the sentiment articulated by Fed Chair Powell in the prior press conference, underscoring the fact that the Fed's team of economists no longer foresees a looming recession.

S&P 500 technical analysis

The S&P 500's retracement from its pinnacle at 4,634 maintains its gradual descent, characterised by its methodical nature that suggests a correction rather than a full-scale reversal.

While the S&P 500 continues to linger below the resistance range of 4,550 to 4,565, the prevailing outlook leans toward a further deepening of the correction, ultimately seeking solace at the support juncture of 4,400 to 4,368. This journey could potentially extend towards the lower extremity of the trend channel, residing around 4,250 to 4,225.

As we approach the closing days of September, our focus will be intently set on discerning any signals of consolidation within these two support zones. This strategic observation aims to facilitate optimal positioning, envisioning a potential resurgence that could propel the index into a robust rally as the year concludes.

S&P 500 daily chart

Nasdaq technical analysis

The Nasdaq's rapid descent, plummeting below the 15,200 mark last week, effectively invalidated the notion of a shallow "abc" Elliott Wave-style correction stemming from the 16,062 high.

While the index continues to dwell beneath the resistance zone at 15,500/600, our anticipation is for the ongoing correction to take a deeper course, targeting the nadir set in late June at 14,853. Should this correction break through the support at 14,853, it will set the stage for a subsequent move towards the comfort of trend channel support located at 14,500. This marks a level that the Nasdaq traded at a mere two and a half months ago.

Nasdaq daily chart

Dow Jones technical analysis

The Dow Jones Industrial Average demonstrated its strength with a remarkable run of 13 consecutive higher closes that concluded at the close of July. Early August, however, brought a marginal new high at 35,679, a fleeting achievement overshadowed by the extended correction witnessed in the high beta Nasdaq index.

The Nasdaq's ongoing correction, rather than consolidation, has implications for the Dow Jones. This vulnerability, exacerbated by its recent break of the critical 35,000 support level, suggests a potential for a deeper pullback. This could lead the index towards a convergence of support at 34,500/250, a range that once marked former highs. A pivotal support lies just below this zone, with uptrend support originating from the October 28,660 low, standing at 34,000.

A decisive turning point hinges on whether the Dow Jones can muster a close above its recent high of 35,679. Such a move would signify the end of the ongoing correction and the resumption of the underlying uptrend.

Dow Jones daily chart

• _{TradingView: the figures stated are as of August 16, 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.}