US STOCKS OUTLOOK:
- S&P 500 and Nasdaq 100 rally on positive market sentiment following better-than-expected ISM PMI results
- Strong U.S. service sector data suggests the economy is not about to fall off the cliff
- To better gauge the strength of the recovery, traders should keep a close eye on U.S. labor market survey due Friday
After a subdued performance earlier this week, U.S. stocks surged on Wednesday on upbeat investor sentiment after key data showed the U.S. economy remains resilient and inflationary pressures are turning the corner. When it was all said and done, the S&P 500 rallied 1.56% to 4,155, with all the index sectors ending in positive territory, except for energy, which suffered heavy losses on the back of a steep drop in oil prices. The Nasdaq 100, for its part, jumped 2.73% to 13,253, closing at its best level since May 5 and coming a whisker away from exiting bear market territory, bolstered by a solid rally in Amazon, Meta Platforms and Apple shares.
A PMI report released earlier by the Institute for Supply Management (ISM) revealed that non-manufacturing activity unexpectedly rebounded in July, expanding at the fastest pace in three months, easing fears that the country is headed for a recession. On the inflation front, the ISM survey’s prices paid index eased to 72.3 from 80.1 in June, a sign that the cost burden on service providers is not growing as rapidly as earlier in the year. If this trend is sustained, CPI readings could begin to roll over quickly this fall, paving the way for the Fed to embrace a less hawkish policy stance before the end of 2022. This scenario could be bullish for stocks.
Elsewhere, San Francisco Fed President Mary Daly’s comments indicating that it would be reasonable for the U.S. central bank to raise interest rates by half a percentage point rather than 75 basis points at the September FOMC meeting also buoyed investors’ mood, accelerating buying interest on Wall Street. While it may be premature to position for a monetary policy shift at this point in light of elevated inflation risks, traders are increasing bets that the Fed will pivot later this year and begin cutting rates in 2023 to counter the economic slowdown.
To best prepare for what lies ahead in the equity space, it is important to keep an eye on incoming data. There are no high-impact events on the calendar on Thursday, but Friday brings the July nonfarm payrolls report. Expectations in a Bloomberg News poll suggest that U.S. employers created 250,000 jobs last month, after adding 372,000 workers in June. For sentiment to improve further, employment numbers should remain healthy, but not too hot, as tight labor markets could bolster wage pressures and thus inflation. That said, any result that is around consensus forecasts can be supportive for risk assets, provided average hourly earnings continue to ease.
S&P 500 TECHNICAL CHART
After Wednesday’s strong upswing, the S&P 500 arrived at the door of a key technical resistance at 4,160-4,175, but failed to clear this barrier. For bullish momentum to extend, we need to see a decisive break above 4,160-4,175 in the coming sessions. If this scenario plays out, the index could be on its way to challenge the 200-day simple moving average and channel resistance around the psychological 4,300 handle. On the flip side, if sellers return and spark a bearish reversal from current levels, initial support appears at 4,065. If this floor were to be invalidated, traders should brace for the possibility of a retreat towards 3,920, near the 50-day simple moving average.
S&P 500 TECHNICAL CHART
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—Written by Diego Colman, Market Strategist for DailyFX