Markets look for guidance after Powell speech, eyeing US CPI: USD, S&P 500, DAX 40
12:34, 8 February 2023
Markets were focused on Powell’s speech on Tuesday to provide some further direction and clarity but that has come and gone and the feeling of uncertainty remains the same. The takeaway from the event is that Powell remained hawkish but traders are still not convinced that his plan to keep the terminal rate unchanged in 2023 will happen. At this point, they are looking for any reason to remain bullish on equities but are struggling to do so. This leaves markets at a slight crossroads, starting with the US dollar, which has seen a pause to the three-day rally that started last week.
The dollar index has now undone the move higher on Monday and is sitting around the lows for the week, whilst the 10-year US yield is holding above its longer-term ascending trend line from 2022. I still believe there is some further room to move higher over the coming weeks as market pricing adapts to the likelihood of no rate cuts in 2023 due to the resilience of the US economy. But, given how markets are undermining Powell’s hawkishness, it may be the case that momentum shifts to equities once again, leaving the dollar and yields to edge lower.
In reality, the NFP reading on Friday, whilst slightly shocking, is just one reading, which could also have been slightly skewed by seasonality factors. The data from December is still painting a much weaker picture of the economy, and I expect that is where traders are putting most of their focus on. That’s why the rest of the data for January is going to be key in the next couple of weeks. The CPI on Tuesday will be very closely watched and I expect volatility to ramp up around the event as markets try and figure out whether the jobs data is the one outlier or if it's an early indication of the fact that there may not be a recession this year as previously thought.
At the end of the day, strong economic data should be positive for equity markets as it reflects future profitability for companies, but markets seem to be stuck in this “need the Fed to reverse tightening” mentality that makes it hard to try and forecast what the reaction will be for the upcoming data.
For now, US equity indices are testing the waters to see how much appetite there is to move higher, which will likely see some consolidation within the bullish move, with a bit of sideways action and restricted selloffs. The daily S&P 500 chart has marked four consecutive candlesticks with lower highs and lows despite the attempted rally on Tuesday which is a sign of weakness within the uptrend. That said, the price has finally managed to catch up to the RSI in achieving a break above the December 13th high which has cleared some of the bearish pressure, but they are both now trending downwards.
In Europe, the DAX 40 remains resilient despite the attempted reversal last week. 15,263 seems to be an area of increased confluence at the moment as it has acted as both support and resistance over the past 3 weeks. The path of least resistance remains to the upside above 15,000 where there is still likely to be a lot of support.