US indices on a breather ahead of key job report: Russell 2000, USD/JPY, Gold prices

Market Recap

After the recent stellar gains from Federal Reserve (Fed)’s peak hawkishness, major US indices largely took a breather on some profit-taking overnight despite the US dollar and Treasury yields heading lower. Economic data continued to reveal a softer inflation picture, with the US core Personal Consumption Expenditures (PCE) price index coming in below expectations at 0.2% month-on-month (MoM) (0.3% consensus). The US Institute for Supply Management (ISM) manufacturing Purchasing Managers' Index (PMI) also showed pricing pressures falling deeper into contractionary territory, which marked its ninth consecutive months of decline. However, the trade-off for growth to tighter policies comes with further moderation in new orders and order backlogs, which saw manufacturing conditions contracting for the first time since June 2020. Initial reaction to the PMI’s underperformance was to the downside however, that could suggest with inflation risks behind us now, ‘bad news’ in economic data may not be ‘good news’ for markets as recession fears could be brewing. Further negative market reaction to lower-than-expected growth data may be looked upon to confirm this.

The US job report will be the key risk event today. Current expectations are pointing to job gains of 200,000, which is a step closer to pre-Covid levels. Unemployment rate is expected to remain unchanged at 3.7%. The Russell 2000 index remains guided by its near-term rising channel pattern, recently finding a bounce off its lower channel trendline. Trading within the channel could leave the 1,956 level on watch for upper resistance, while the 1,820 level will serve as lower support.

Asia Open

Asian stocks look set for a negative open, with Nikkei -1.37%, ASX -0.70% and KOSPI -0.80% at the time of writing. China continues to indicate further steps towards relaxation of its zero-Covid policies, allowing some Covid-infected people to isolate at home, along with some downplaying of the severity of the virus in state media. The China A50 index has been lifted above the 12,600 level, while the Hang Seng index is at its two-month high. Some near-term profit-taking could be on the table however, after a push higher was marked with the formation of a bearish pin bar.

Economic data this morning showed inflation in South Korea easing more than expected at 5% year-on-year (YoY). Now with signs of global inflation clearly coming off its peak and reacting positively to tighter policies, the next leg will be whether it can keep up the pace in moderating towards central banks’ 2% target range. The day ahead will be relatively quiet on the economic calendar for Asia, leaving all eyes on the US job report tonight.

Recent breakdown of the US dollar index has brought about an in-tandem move for the USD/JPY (大口）, with the 138.40 level of support giving way and bringing a retest of the 135.20 level. This marked the next level of Fibonacci retracement, with the formation of a new lower low reinforcing its downward bias. A further breakdown below this level could seem to pave the way towards the 130.00 level next.

On the watchlist: Gold prices retesting August peak

Having been tracking the US dollar moves closely, gold prices have pushed to a new higher high yesterday as the former has reached a new lower low. With markets still riding on the peak hawkishness narrative from the Fed, US Treasury yields are also trending lower, with the US 2-year at its two-month low. Lower yields provide a supportive environment for gold, translating to lower opportunity cost for the non-yielding asset. Net positioning for managed money showed some unwinding of the extreme bearish positioning in gold over the past month, after net-long positioning reached its 2019 low previously. This could place the US$1,840 level on watch next, with all eyes on the US job report later today.

Thursday: DJIA -0.56%; S&P 500 -0.09%; Nasdaq +0.13%, DAX +0.65%, FTSE -0.19%