US equity markets finished lower last week as volatility in the bond market, hawkish Fed commentary, and upside inflation surprises in Germany and Australia encouraged traders to move to the sidelines. Month-end rebalancing flows from real-money accounts also likely played a part. Here’s a detailed look at the factors involved.
How real-money accounts influenced traders
A real-money account is the type of account typically managed by asset managers, including pension funds, superannuation funds, and insurance companies. These managers own the underlying assets at their full value rather than using leverage as fast-money accounts do.
When markets have outperformed, as US equity markets did in May, real-money fund managers sell the outperforming asset class or security to return to benchmark weightings for month-end reporting. They also top up their weightings in underperforming markets.
In my opinion, it’s no coincidence that the stunning rebound in US equity markets into the weekend gained momentum after 3.00pm CT (6.00am AEST), a common time for month-end flows to conclude, because that is when the fixing rate is set for asset markets, including US equity futures.
Setting the backdrop for Friday's rebound
Earlier in the session, the Fed's preferred measure of inflation, core PCE (Personal Consumption Expenditures), fell to 2.7% year-on-year in April from 2.8% in March, the lowest since March 2021. The cooler PCE reading leaves the door open for a Fed rate cut in September, to which the rates market is assigning a 50% probability.
This week's focus
This week, the focus will be on ISM Manufacturing and Services PMIs, building up to Friday night's Non-Farm Payrolls release. As a side note, Fed speakers have entered the blackout period before the Fed's upcoming 13 June FOMC meeting.
By ensuring clarity and precision in our communication, we can better understand market movements and prepare accordingly.
What is expected from Non-farm payrolls
Date: Friday 7 June at 10.30pm AEST
Last April, the US economy added 175,000 jobs, a sharp fall from an upwardly revised 315,000 jobs in March and below consensus expectations of 243,000. The unemployment rate increased to 3.9% from 3.8% on an unchanged participation rate of 62.7%. Rounding out the softer set of numbers, average hourly earnings rose by 0.2% month over month, allowing the annual rate to fall to 3.9% year-on-year in April from 4.1% prior.
Fed speakers have emphasised they are in no rush to cut rates. However, Fed speakers have also signalled that an unexpected deterioration in the labour market would provide a faster path to rate cuts.
This May, the market expects the US economy to add 180,000 jobs and the unemployment rate to remain stable at 3.9%. The participation rate is expected to remain at 62.7%, and average hourly earnings are expected to remain stable at 3.9% year-on-year.
US unemployment rate chart
S&P 500 technical analysis
In last week's update, we noted the loss of momentum weekly candle that formed at the 5341 high and that its close was below important trendline resistance at 5310/20ish, drawn from the January 2022 high of 4818.
While we did see some downside follow-through early last week, the rebound into Friday's close does leave a clouded picture. We still need the S&P 500 to post a weekly close above the weekly trendline resistance at 5310/25 to move to a more positive bias.
On the downside, a sustained break below 5200/5180ish would increase the chances that the S&P 500 has topped and that a deeper decline is underway.
S&P 500 weekly chart
Nasdaq 100 technical analysis
The Nasdaq’s pop above weekly trendline resistance at 18,650/70ish (coming from the 16,764 high of November 2021) was short-lived, as it finished last week back below it.
While we did see some downside follow-through early last week, the rebound into Friday's close does leave a clouded picture. The Nasdaq needs to get back above weekly trendline resistance at 18,650/750 to open up a move towards 19,300ish.
On the downside, a sustained break below 5200/5180ish would increase the chances that the S&P 500 has topped and that a deeper decline is underway. A weekly close below support at 17,750 would indicate that the rally has run its course and that the deeper decline is underway.
Nasdaq weekly chart
- Source: TradingView. The figures stated are as of 3 June 2024. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.
