Thursday’s US inflation report increased investors’ appetite for risk as the call for tapering was doused at least before next week’s FOMC report. The US 10-year treasury yield quickly collapsed to its lowest in three months while Wallstreet turned green. However, the dollar remains indecisive, hovering around a solid range.
The world’s largest economy has seen expansion following the restart of business activities. In the first quarter of the year, the US economy expanded by 6.4% to follow up with recoveries in the last two quarters of 2020 and thus lifted it from the pandemic’s snare. The recoveries have been faster than anticipated and thus investors look forward to the Federal Reserve cutting down its excessive support. However, the Fed’s main focus is on its two core mandates – inflation and employment.
US Employment Report
Last week Non-Farm Payroll reported over 550,000 new jobs which was a sign of improvement although it missed expectations. The jobless claims also dropped to its lowest since the pandemic started. However, despite about 2.4 million jobs recovered since the turn of the year, there are still over 9.3 million unemployed persons in the US.
If the slowdown in the NFP figures in the last two months continues in the coming months, the US might not be able to reach its pre-pandemic <4% unemployment rate. The US unemployment rate is currently at 5.8%. Therefore there is still more to do in this regard and the Fed might hold on which would dash the tapering hopes.
However, there are clear signs that the US job market is back on its feet. Also, with over 305 million doses of vaccine given out already in the country and the G7 nations promising an additional 1 billion doses worldwide, the Fed might show some confidence in reaching its maximum employment goal in a short timeline and might influence its next next move.
In recent weeks, the Fed has always expressed that it’s in no rush to adjust despite inflation rates flying above the limit. Thursday’s last CPI data propelled the annual inflation rate to 5.2% at the end of May which means the rate has been steadily increasing MoM since the start of the year.
Inflation is transitory and will adjust as the economy gets healthier according to the policymakers. We will have to see if the Fed still maintains this thought or recent stance will be altered.
US Federal Reserve’s next move
With what has happened in the last few weeks, investors will weigh on the Fed’s decision, tone and forecast in the next week’s FOMC minute. Rapid vaccination pace, better GDP, higher inflation and disappointing but improved employment data are some of the indicators the bank will be harnessing.
While immediate tapering seems to be out of the options, the monetary committee might set a closer timeline for tapering which will be good for the dollar and bearish for the stock market but employment remains the biggest barrier. Otherwise, a dovish or waiting Fed will boost risk and pressure the dollar. It’s all in the hands of the Fed and they have until Wednesday to reveal their details. However, the technical charts below suggest a near-term risk-off outlook for the US markets.
Treasury Yield technical analysis
The US treasury yield dived to 1.43% on Friday – its lowest in 3 months. However, as the chart above shows, the long-term bearish chart structure for April is corrective – a double zigzag structure. We will therefore most likely see another resurgence attempt next week. If the technical channel base holds, the yield could retest the 1.55% key area and then lift the dollar. However, a breach below the channel support base could collapse this instrument toward 1.3% and further worsen the Dollar.
S&P 500 technical analysis
The S&P500 is topping again as the bullish wedge above could limit further rallies. Meanwhile, the current move should continue above the 4245 record high to set another around 4265. A bearish reversal is imminent especially if risk-off comes sometime next week as expected.
Dollar Index technical analysis
After completing a bearish impulse wave toward the end of May, the dollar started recovery with the technical targets at 91, 91.5 and 92. However, a shallow corrective structure ended last week, and a fall was triggered by Friday’s NFP miss. Meanwhile, the bears have lost momentum in the second half of this week and now looks like the bullish correction will continue with a more complex corrective rally. A break above the 90.25-90.3 resistance zone should support a further surge toward 91 next week.
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