10:17, 5 April 2023
The recent rally in us stock indices seems to have reached a short-term top as momentum is starting to reverse lower. Both the S&P 500 and the Nasdaq are trading lower at the beginning of this shortened week as recent data has reignited fears about an economic recession.
The JOLTS job openings in February dropped to the lowest level in almost two years, suggesting the job market is starting to cool, alongside a drop in factory orders. In reality, the data suggests a return to more normal conditions in the US labour market, which at points throughout last year saw more than 2 vacancies per unemployed person, something that Jerome Powell was desperate to see come down. The tightening of the gap between job vacancies and unemployed will be welcomed by the Fed as it plays nicely into the tightening of financial conditions the central bank has been looking for.
A factor that has also been key in the last 2 years is wage inflation and the pressure on employers to offer more pay to attract talent. The reduction in job opportunities means the labour market is loosening and this can be expected to reduce some of the wage inflation, helping Powell and his team further.
A key data release to watch out for this week, despite the Easter bank holidays, will be the Non-farm Payrolls (NFP) data out on Friday. It’s important to note that the JOLTs data is backwards looking and have only accounted for the time up until February, which means that the banking turmoil in March, and other high-level layoffs, have not yet been accounted for. Thus, we can expect the job openings in March to continue this downward trend, but also potentially a weaker NFP reading this Friday, with a potential uptick in unemployment, something the Fed is eagerly hoping for.
The reaction in markets is going to be tricky to try and predict – not that it’s ever easy. Over the past 6 months, we have had a few shifts in mentality, going from the fear of inflation and thus looking for softer economic data, to the fear of recession and thus hoping for not-so-bad data after all. We seem to be shifting back again to concerns about persistent inflation all whilst the slowing in economic data is causing some panic, which means that it’s not so clear anymore that bad data is good, or vice versa.
Looking at the performance of equity indices over the past few weeks, we can see that the recent rally has been skewed by the feeling of relief that the banking crisis has not spiralled out of control (yet). Since the FOMC meeting two weeks ago, when Powell was successful in calming investors about the banking rout and the health of the US economy, there has been a mixed reading of economic data, including a drop in the final Q4 GDP reading, a bigger-than-expected drop in the core PCE price index, and a better-than-expected consumer confidence reading.
Risk appetite has remained strong throughout which has allowed equities to push higher, with the Nasdaq 100 hitting a 7-month high. The S&P 500 has also shown some strong momentum but the pullback on the back of the banking rout weighed more heavily on the index, which is more influenced by financials
Looking ahead at Friday’s data, a weak reading and a potential rise in unemployment would play into the JOLTs data and suggest that the tightness in the labour market is unwinding, which will in turn get investors thinking that it can influence Powell’s decision about the rate decision next month. This could see US equity indices resume their upward momentum. That said, any surprise, regardless of the direction, will likely weigh on equities, because it either means that the jobs market remains tight and therefore wage inflation will continue, which is negative for stocks, or that the weakness in the economy is greater than feared, which is also negative for stocks.
S&P 500 daily chart
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