U.S. fundamentals losing momentum


Fxprimus Representative
After a surprise from the non-farm payroll data published last week, when the print came in at 266,000 new jobs added whilst the consensus expected 978,000 new jobs, market participants are keeping a close eye on U.S. retail sales data published on this coming Friday. Although non-farm payroll data has historically allowed us to gauge the health of the U.S. labor market and the economy, this month’s number should be interpreted with a pinch of salt.
Non-farm payroll has historically been considered as a leading indicator, representing the number of new jobs added in all non-agricultural businesses. A surprise to the upside or downside would generally cause a significant market volatility in equity but also in credit and FX markets. The effect has weakened in recent years with markets interpreting bad news as good news as the central banks and governments have continued to provide liquidity and support to the markets since the Great Financial Crisis in 2008. After a shock print in April last year when 20 million jobs were cut, markets have seemingly become numb to weak data prints. Although only 14 million jobs have been added since, leaving an estimated gap of 6-8 million unemployed or underemployed workers in the U.S., equity markets have been marching higher, reaching all-time highs week after week.
We witnessed the same last Friday – despite a disappointing print of 266k new jobs (versus the expectation of 978k) and a downward revision of previous month’s data, S&P 500 closed at all-time high of 4232.61. This weak print can be interpreted in a number of ways – potentially the consensus got a bit ahead of itself, extrapolating the strong numbers in Q1 this year. Also, given the ample support from the federal government in the U.S., individuals may be unmotivated to return to the workplace, especially in lower paid roles. A fear of catching coronavirus may also play into the thesis. Lastly, we may witness a structural change in the labor market as there is less demand for people in certain sectors, with corporations increasing productivity through automation. Business capex has been on the rise with an increase of 16.7% in Q1 this year. Moreover, corporate expenditure on technology as a share of GDP has expanded by 6% – the highest it has ever been.

All eyes are now on the retail sales data published this coming Friday. After a popping March print of 9.7% expansion, we can expect a significantly weaker number this week. Retail sales have clearly been supported by direct stimulus cheques sent to individuals, as the jump in data coincides with months when cheques were sent out. Now that direct payments to individuals are nearly all paid out, we can anticipate retail sales to roll off as well. The momentum might carry over to Q2 but it is unlikely that it will provide the same level of support we saw in the previous quarter when consumer spending grew by 10.7% on an annual rate. Disappointing retail sales might put pressure on U.S. companies in consumer staples and consumer discretionary sectors but weakening sentiment could potentially hurt risk assets as a whole.

S&P 500 closed at all-time high, gaining 1.23% to 4232.61. Nasdaq-100 shed 1.02% to 13719.63 points as the fear of higher interest rates reverberated across markets. Russell 2000, representing U.S. small and medium companies, was largely flat gaining 0.23%. The dollar index DXY lost -1.17%, near 90.23 and not far from swing lows of 89.9. Gold and oil futures rose respectively 3.35% and 2.17%, supported by the weaker U.S dollar.

In The Spotlight
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• Chinese and U.S. CPI
CPI or inflation, measures the rise in consumer prices in an economy over a certain period of time. Higher inflation means that consumer prices have grown compared to the previous period. Higher than expected rate may be both positive or negative for currency as the market does not like inflation expectations too far off from consensus. Generally, both high and negative inflation are bearish for currency, while positive and low inflation, in line with expectations, is bullish
• U.K. Gross Domestic Product
GDP data shows the monetary value of all the goods and services produced in the U.K. After a sharp recession in 2020, the U.K. is expected to bounce back this year with the consensus expecting 0.5% expansion for Q1. A negative number indicates a contraction of economic activity while a positive number shows an expansion. A better than expected GDP growth is generally positive for GBP, whilst a print below expectations tends to be negative.

Market Sentiment

EURUSD jumped higher last week, testing currently swing highs of 1.21755. Price is nearing overbought levels, testing upper Bollinger band resistance but stochastic and RSI signal that price has still room to move higher. Momentum indicators are stacked bullishly short-run, while 50-day and 200-day simple moving averages are both near 1.19470, and 50-day SMA is about to cross above 200-day SMA, forming a golden cross on the daily chart. ADX of 29 signals there is moderate energy in the trend and DMI+ of 31 dominating DMI- of 13 indicates that bullish momentum prevails. Resistance levels are near 1.21640 and 1.21755, while support is near 1.21270 and 1.20635.
Resistance: 1.21640
Support: 1.21300

GBPUSD is near swing high of 1.41, testing upper Bollinger band resistance level. Momentum indicators are stacked in a bullish fashion, albeit with little air between short-term indicators. There is little energy in the momentum and price is trading in neutral zone. Resistance levels have formed near 1.40800 and 1.41400, while support is 1.39610 and 1.39060.
Resistance: 1.40800

NZDUSD is showing little conviction this morning with Doji candlestick forming on the daily chart. Momentum indicators signal bullish trend, although with little energy. Price action is in neutral territory and upper Bollinger band is not too far, offering resistance near 0.73100. Resistance levels are near 0.73000 and 0.73100 while support is near 0.72130 and 0.71660.
Resistance: 0.73000

XAUUSD pair has broken upper Bollinger band resistance level and continues to march higher. Momentum indicators signal strong bullish momentum, whilst price is nearly overbought as stochastic is 84 and RSI 69. Price is about test 200-day simple moving average resistance level near 1,852.90, while resistance has also formed near 1,843.07. Support is near 1,815.67 and 1,797.57.
Resistance: 1,843.07
Support: 1,815.67