All eyes on upcoming US job report: Nasdaq 100, Nikkei 225, GBP/USD

Market Recap

The US equity indices struggled to retain recent gains, as the economic calendar presented a significantly higher-than-expected US private sector payrolls for December (235,000 versus 150,000 forecast), which kept risk sentiments under pressure. While the data generally has not been a strong predictor for the US non-farm payroll report, it adds to the list of labour data this week pointing to a more resilient US labour demand, which seems to go against the Federal Reserve (Fed)’s aim of slowing hiring and limiting wage pressures. Potential persistence in wage growth and expectations that the Fed may need to keep rates high for longer are driving some de-risking into the non-farm payroll release later today. On another front, the weekly initial jobless claims data also came in lower than expected (204,000 versus 225,000 expected).

With the more dovish pricing in market expectations for the Fed’s rate hike outlook as compared to Fed officials’ views over the past month, the confluence of labour market data this week has led to some mounting bets that an eventual move in terminal rate above 5% will be necessary. While market participants are still pricing for a potential rate cut towards the end of the year, the odds have shifted to reflect lower probability and a push-back in timeline. Ahead, all eyes will be on the US job report as market participants are still seeking justification for the year-end 5.1% rate projection from the Fed. Any outperformance in wage pressures could be a catalyst to add to recent jitters.

The rate-sensitive Nasdaq 100 index has remained stuck in a ranging pattern thus far, as it struggles to move higher despite nearing a key Fibonacci confluence zone at the 10,700 level. This is also aligned with its previous bottoms in October and November last year. Further consolidation at the key support zone could point to the growing exhaust of buyers, which may increase the chances of a downward break. A move below previous bottoms could reiterate the ongoing downward bias with the formation of a new lower low, paving the way to the key psychological 10,000 level next.

Asia Open

Asian stocks look set for a muted open, with Nikkei +0.01%, ASX +0.35% and KOSPI +0.36% at the time of writing. Overall risk sentiments could lean more towards a wait-and-see in the lead-up to the US job report later, lacking a clear conviction in market direction from Wall Street over the past few days. US-listed Chinese equities continued to find its way higher overnight, with the Nasdaq Golden China Index up by 1.6%, reflecting lingering optimism that the worst could be over with economic reopening, supportive policy measures and abating regulatory risks. The economic calendar in the region today saw a larger-than-expected drop in Japan’s real cash earnings, which supports the Bank of Japan (BoJ)’s views of keeping accommodative policies in place for now. That said, signs of a rebound in its services sector in December from improved tourism flows delivered an encouraging sign in providing some cushion for its moderating manufacturing activities.

After the ‘hawkish interpretation’ of the adjustment to its yield curve control policy at the previous BoJ’s meeting, the Nikkei 225 index is back to retest its previous bottoms at the 25,580 level. Some dip-buying has been seen with the formation of bullish pin bars at this level, while the relative strength index (RSI) is attempting to revert to more neutral territory from its oversold region. That said, the Nikkei 225 is likely to take its cue from Wall Street ahead, with any subsequent break of the 25,580 level potentially paving the way towards the 24,500 level next.

On the watchlist: Sellers regaining control of GBP/USD after period of consolidation

After a brief period of consolidation, sellers seem to be regaining control of the GBP/USD after the pair failed to move above the 1.210 level of resistance. A confluence of headwinds is at play, with downbeat signs of the economy presented in UK mortgage approvals and a slightly lower-than-expected final reading for December’s service sector Purchasing Managers' Index (PMI) (49.9 versus 50.0 consensus). This is coupled with renewed strength in the US dollar on a hawkish interpretation of the recent Federal Open Market Committee (FOMC) minutes and a more gloomy risk environment overnight, which weighed on the risk-sensitive pound. The pair has broken below a key 23.6% Fibonacci retracement level, potentially setting its sight on the 1.163 level next, where a 38.2% Fibonacci level runs in coincidence with its 100-day moving average (MA).

Thursday: DJIA -1.02%; S&P 500 -1.16%; Nasdaq -1.47%, DAX -0.38%, FTSE +0.64%