Fed likely to hike interest rates further

  • Big US jobs growth: Markets are increasing the prospect of further rate hikes from the Fed 
  • Watch out for Powell: Tuesday’s speech from the Fed chair is a key event on the economic calendar.
  • Equities seeing profit taking: We are seeing Indices falling over since the payrolls report. US futures show this move continuing today.

A huge nonfarm payrolls surprise

Pretty much everyone was caught out by Friday’s incredible upside surprise in the US Nonfarm Payrolls data.

Jobs growth of 517,000 smashed the expectations of 188,000 out of the water (it also seriously questions how good the ADP Employment change is as a predictor after a lower-than-expected 106,000). 

Furthermore, unemployment dropped to 3.4% whilst wage growth was around expectations at 4.4%. 

Now, it can dangerous to read too much into one month of rogue data. However, in the FOMC press conference last week, Fed chair Powell said that there was room for rates to be hiked “a couple more times”. This jobs report fits into that narrative. 

The impact on expectations of Fed tightening

Already we have seen rates markets reacting. Previously, markets had been positioned for one more hike in March and then done.

Now, according to the CME Group FedWatch Tool, we see:

  • A near 100% probability for a 25 basis points hike in March
  • Around 60% probability of another hike in May

Fed Funds futures are also pricing the terminal rate (the peak of the rate hikes) to be above 5.00%, the first time in several weeks it has been this high.

Risk of profit-taking on equities after US jobs surprise

Traders will certainly be keeping an eye on the speech of Fed Chair Powell on Tuesday for signs of baking in these expectations.

Equities set for a period of profit-taking?

The key issue is how this move will impact equity markets. There has been a strong start to 2023 for equities. But this could now be set for some profit-taking.

Markets have been rallying on expectations that the Fed would likely be on pause from March. There has been a tug-of-war between the Fed and markets over how much further the Fed would go. 

After the Fed meeting last week, markets did not believe Powell. There might now need to be a reset for markets.

Already we have seen a pullback starting. This profit-taking move could now continue in the days ahead.

NAS 100 sees sharper rally than S&P 500, FTSE 100 drops from all-time highs

S&P 500 futures

The rally has been impressive but is now pulling back lower. After hitting a 5-month high last week, key resistance has been left at 4208. 

  • Friday’s daily candle was bearish, with a decisive close lower. Early today, this move is continuing lower 
  • Initial support at 4105/4140 is being tested. If this is broken on a closing basis, it opens a deeper near-term pullback.
  • The daily RSI is unwinding into the low 60s. This has further room to correct lower.
  • We are watching the 21-day moving average (c. 4036) as a gauge

If the move continues lower then the key support is at last week’s high low of 4007. If this is broken it would end a run of near-term higher lows and turn the market corrective.

For now, supported weakness is still an opportunity to buy. However, we prefer to see how far this pullback goes near term.

Risk of profit-taking on equities after US jobs surprise

NASDAQ 100 futures

NASDAQ has seen a sharper rally than the S&P 500 and therefore could be subjected to a larger pullback.

Friday’s negative daily candle and the early decline this morning suggest that there is a near-term corrective move underway.

  • The high at 12947 is now key resistance.
  • Initial support is at 12305/12387.
  • A four-week uptrend adds further support at 12150
  • The daily RSI has room to unwind from the high 60s down towards 50/60.

However, on a technical basis, this still looks to be a near-term unwind within a medium-term recovery.

Risk of profit-taking on equities after US jobs surprise

FTSE 100 index

The UK stock market has been on a strong run higher in recent weeks and hit an all-time high of 7920 on Friday. 

It is pulling lower this morning, but for now, this is just an unwind within the strong uptrend since October. This is also unwinding the daily RSI from over 70, which should help to renew upside potential for further new highs in the weeks to come.

  • Initial support is at 7818
  • The key change to the outlook would be if support at 7712 was broken. It would complete a top pattern.

    Risk of profit-taking on equities after US jobs surprise

Support and resistance levels for major markets

Risk of profit-taking on equities after US jobs surprise

This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. INFINOX is not authorised to provide investment advice. No opinion given in the material constitutes a recommendation by INFINOX or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

All trading carries risk.