Quiet start to the week, with some wait-and-see for S&P 500

Market Recap

Optimism of a more cautious Fed coming after the US Automatic Data Processing (ADP) payroll release was dampened last week, as a better-than-expected US non-farm job report did not provide the confirmation markets were seeking. US added 390,000 jobs in May, coming in above the 325,000 gains expected. The unemployment rate remains unchanged at 3.6%, while average hourly earnings held steady at a 0.3% growth month-on-month. The robust recovery in the labour market, accompanied with ongoing rise in wage pressures, is likely to pave the way for an aggressive Fed to be in place with some upward revisions in rate hike bets coming after the job report release. A further rise in crude oil prices above US$120 per barrel to end last week also did not provide much relief on the inflation front. Saudi Arabia raised its crude prices for Asia by more than expected as a reflection of increased expectations for a demand rebound from China’s reopening. The US dollar strengthened, while Treasury yields ticked slightly higher.

Later this week, market participants will get a fresh update on US inflation from the US consumer price index (CPI) data, which marks the last CPI release before the Fed meeting next week (14-15 June). A 50 basis-point hike in the June and July Federal Open Market Committee (FOMC) meeting has been largely anchored, but the report will be looked upon to determine if we can potentially see a pause in rate hikes in September. Expectations are for headline CPI to remain unchanged at an 8.3% increase year-on-year (YoY), while core inflation is expected to come in at 5.9% from April’s 6.2%. A lower-than-expected print may be needed to provide some relief that US inflation has continued to peak, providing a potential catalyst for equity bulls to take back some control. Markets may also be highly sensitive to any cues on central banks’ policy outlook, with interest rate decision from Reserve Bank of Australia (RBA) and European Central Bank (ECB) this week on close watch as well.

The Russell 2000 continued to face resistance at the 1,900 level last Friday, reinforcing the level as a key support-turned-resistance to overcome in coincidence with a 23.6% Fibonacci retracement. The higher high and higher lows over the past three weeks may still leave some hopes for a near-term upward trend, with one to watch for any break above the level which may unlock room to retest the 2,000 level next.

Asia Open

Asian stocks look set for a muted open, with Nikkei -0.25% and ASX -0.35% at the time of writing. Markets in South Korea and New Zealand are closed for holiday. The downbeat mood in Wall Street to end last week, along with some wait-and-see this morning on the US equity futures, seem to suggest a cautious session in Asia. Some pockets of optimism may come from further easing of virus restrictions in Beijing, as the shift to normalcy continues and put Covid-19 risks in the backseat for now. That said, the largely quiet economic calendar may still leave the bulk of market’s attention to revolve around Fed’s aggressive tightening and higher oil prices, which may seem to put a cap on overall session’s gains.

Today’s economic data to watch may lie in China’s Caixin services purchasing managers index (PMI) as another gauge of how small private firms were holding up in May. Coming after previous underperformance in Caixin manufacturing reading, a larger-than-expected impact of virus restrictions on smaller firms was highlighted, with the upcoming services PMI reading looked upon as confirmation. Current expectations are for an improvement to 46.0 from 36.2 in April, while still remaining in contractionary territory.

On another note, the Japan 225 is attempting to break above a key downward trendline, which has weighed on the index on at least four occasions since September last year. This also coincides with a key 50% Fibonacci retracement as a level of resistance. A break above the downward trendline may reflect a greater reversal in sentiments to the upside, potentially leaving the 28,400 level on watch next.

On the watchlist: USD/JPY back to retest key resistance at 131.00 level

After a retracement in May, a rise in US 10-year Treasury yields last week has led the USD/JPY (大口） to retest its key resistance at the 131.00 level once more on expectations of both central banks’ policy divergence. The level has weighed on the currency pair on two occasions since April. Further strength was observed last Friday, coming after a better-than-expected US job report, which paved the way for an aggressive Fed to be in place. A break above the 131.00 level may mark a 20-year high for the USD/JPY, reinforcing the upward trend for the currency pair and potentially bringing back calls of FX intervention from Japanese authorities. That may then leave the 135.00 level on watch next. Any retracement will leave the 126.30 on watch as near-term support.

Friday: DJIA -1.05%; S&P 500 -1.63%; Nasdaq -2.47%, DAX -0.17%