Strong US job report challenge Fed’s pivot: Nasdaq 100, China A50, US dollar index

Market Recap

The release of the US job report last Friday led to a mixed session in Wall Street overall (DJIA +0.23%; S&P 500 -0.16%; Nasdaq -0.50%), as the huge outperformance in US July job report drove markets to lean towards a 75 basis-point (bp) hike in the September Federal Open Market Committee (FOMC) meeting with a 70% probability. This comes as the US July job gains more than doubled market expectations at 528,000 versus 250,000. The unemployment rate ticked lower to 3.5% from previous 3.6%, while wage growth pulled in at 5.2% above the expected 4.9%. All of these point to the go-ahead for Federal Reserve (Fed) to tighten further, seemingly having some push-back against previous comments by Fed Chair Jerome Powell of a Fed pivot, which has been one of the key catalysts underpinning risk sentiments over the past two weeks.

US Treasury yields reacted strongly to the upside across the board with the US 10-year at 2.83%, along with an uplift for the US dollar. The inversion between the 2-year and 10-year yields also deepened further. Nevertheless, market participants seem to be taking it in stride with the significant paring of losses in Wall Street throughout the trading session, as risk sentiments attempted to hold up despite an initial move lower. Fresh consumer price index (CPI) data out of the US will further test risk sentiments this week. Any upside surprise in pricing pressures near to the 9% mark could reinforce the prospects of more aggressive tightening from the Fed and potentially bring back near-term headwinds for risk assets, especially with technical conditions trending near overbought levels. Any retracement in major US indices will still leave the formation of a new higher low on watch as a continuation of the recent risk rally. For the US Tech 100, it will be around the 13,000 level, where a confluence of Fibonacci retracement level stands in place.

Over the weekend, the Senate passed a US$430 billion bill intended to fight climate change, lower drug prices and raise some corporate taxes. The bill to allow some drug price negotiations could weigh on pharmaceutical companies, which have generally been riding on their strong pricing power. The corporate minimum tax and stock buyback tax might also affect bigger companies, particularly tech companies, which has generally engaged in massive buybacks over the past years. On the other hand, further push into green energy with incentives and tax credits could leave electric vehicle (EV) makers on watch, along with renewable energy companies. For now, markets seem to react little to the bill with muted moves in the US futures, largely riding on some indecision from the recent job report.

Asia Open

Asian stocks look set for a slightly lower open, with Nikkei -0.08%, ASX -0.28% and KOSPI -0.43% at the time of writing. The new trading week could be off to a more cautious start, coming after the strong US job figures seemingly pushed back against a Fed’s pivot while the US CPI data release this week will provide another hurdle for risk sentiments to cross. On the economic data front, China’s trade data over the weekend provided a positive surprise with its trade surplus rising to a record. Export grew 18% from a year ago (15% consensus), while imports came in at 2.3% (consensus 3.7%). The ongoing outperformance in exports’ figure since August last year suggests that global demand remains resilient to help provide an uplift for China’s sluggish economy. Imports, on the other hand, continue to weigh on muted domestic consumer demand. To kickstart the new week, the quiet schedule on the economic calendar could leave sentiments to linger around the job report, which may not provide a reason to cheer and could lead to some consolidation moves in risk assets.

For the China A50, the index has been trading within a descending channel pattern, recently finding support off a key 23.6% Fibonacci retracement level. It is nearing its upper channel trendline, which could provide a near-term test for investors’ appetite towards Chinese equities. Any break of the channel pattern could leave the 14,000 level on watch as key resistance to overcome.

On the watchlist: US dollar on watch ahead of key CPI data

The surprise upside in US non-farm payrolls and a higher-than-expected wage growth for July have paved the way for hawkish bets to build, with markets now looking at a 70% chance of a 75 bp hike in the September FOMC meeting. For the US dollar index, after finding support at a longer-term upward trendline, it continues to run higher to its one-week high after the jobs data. Having formed a new higher low last Friday, any formation of a higher high will be on watch next. The US CPI data will be a key catalyst for dollar movement this week. With US inflation outperforming expectations for the previous four months, any further outperformance close to the 9% mark could pave the way for the dollar towards the 107.20 level next.

Friday: DJIA +0.23%; S&P 500 -0.16%; Nasdaq -0.50%, DAX -0.65%, FTSE -0.11%