S&P 500, Nasdaq 100, Dow Jones Forecast Ahead of Non-Farm Payrolls (NFP)

[MongiIG]

INDICES TALKING POINTS:

• US Stocks have taken on a tone of weakness following Chair Powell’s speech at Jackson Hole last Friday.
• While equity rallies had built from the June lows, driven by the apparent assumption that the Fed may be nearing a policy pivot, Powell’s remarks made clear that the bank’s priority is on tackling inflation.
• This will likely usher in a renewed focus on data as market participants look for greater signs of economic slowing via jobs and inflation, which highlights tomorrow’s release of Non-farm Payroll numbers for the month of August.

 

Stocks were rocked after Jerome Powell’s speech at Jackson Hole. While the tug-of-war was apparent before last Friday, with some market participants anticipating a policy pivot from the Fed while others were looking for continued hawkish drive to address inflation, the head of the US Central Bank made clear that the focus and priority was on addressing inflation. I discussed this premise in the equity forecast a couple weeks ago, highlighting the fact that it seems that the Fed can’t really afford to miss the mark here.

Inflation can create massive problems and historically speaking, we’re already at far-elevated levels. The most recent example of inflation in this range was in the late-70’s, the era of stagflation. The Fed continued to hike but inflation only continued to rise, and at the source of the problem was an unwillingness of the FOMC Chair at the time, Arthur Burns, to risk a hit to growth by hiking too much. So the problem only continued to build. Until Paul Volcker, that is, who had the idea that to tame inflation, the Fed would have to drain the excess reserves from the banking system, and the best way to do that was by incentivizing that capital with higher rates (and thereby producing an opportunity cost to that capital).

But – to do that Volcker had to hike rates even above inflation. In 1980, CPI was at 13.5%. But Fed Funds was at a whopping 20%! Within two years, inflation had come down and by 1983 CPI was back-below 3%.

The problem is that the US debt-to-GDP ratio is at 137.5% and when Volcker made his move, it was sub-40%. So the US carries much more debt today than it did then, and debt service on such a massive amount of debt makes Volcker’s gambit seem less possible today than it did then.

So, the Fed really wants to get inflation down here because the consequences could be sizable and not simple to address. And this can continue to act as a pressure point for stocks as the Fed is still uncertain of how high they’ll need to hike to actually get inflation to more tolerable levels.

With NFP for tomorrow – tensions are high. This means that moves could be exacerbated on either side based on how the data comes out. And while this might be a captain obvious statement around most NFPs, the deck seems to be especially loaded here as market sentiment remains in a generally terrible state, and this is something where the slightest hint of positivity could create a short-covering rally. The question at that point is how aggressive bears will remain to be – and whether they’ll use those rallies to try to leg into longer-term bearish positions. As such, my resistance levels below are a little wider than usual, in the event of a short-squeeze fueled pullback in US equity indices around NFP tomorrow.

 

Link: S&P 500, Nasdaq 100, Dow Jones analysis

 

Sep 1, 2022 | DailyFX
James Stanley, Senior Strategist