Awful jobs data curbs rapid Wall St. rally; Where next for US stocks?

Summary:

• US stocks called to open higher after 2nd best day of the year

• Further gains capped as ADP falls to 9-year low (27k)

• Pivotal session for S&P500; Is bad news now good?

Tuesday saw a face-ripping rally for indices with US stock markets leading the charge higher. A slightly softer tone from Fed chair Powell didn’t harm the advance but if truth be told he wasn’t that dovish and the gains seemed to be more a case of a quick snap back in sentiment after the recent extreme negativity. In fact yesterday was the 2nd best session of the year and there were further gains overnight and this morning as bulls sought to press home their advantage.

However, the release of the ADP employment change has caused the market to pull back from its daily highs, with a print of 27k vs 185k exp and 271k prior (revised down from 275k) a clear negative for the US economy. This release is seen by many as a precursor to Friday’s non-farm payrolls (NFPs) and given that today’s release was the lowest since March 2010 it clearly does not bode well.

The ADP and NFP have typically shown a pretty good correlation and today’s awful ADP reading raises concerns ahead of Friday’s more widely viewed NFP release. Source: XTB Macrobond

The size of the drop suggests that the US labour market could be starting to weaken and if this is confirmed by a soft NFP then expectations for Fed rate cuts will rise even further. Along these lines the data is clearly negative for the US dollar and positive for bonds and Gold but when it comes to stocks the impact is not quite so clear. In the near term there’s been a 10 point drop in the S&P500 but longer term the question becomes are we back in a position where bad news is good news. On the one hand a weakening labour market is obviously bad news for the economy and could be seen to suggest that the chances of a recession in the not too distant future are rising. However, on the other, looser monetary policy from the Fed has been one of the biggest drivers in the stock market rally and the year-to-date surge was arguably more due to a U-turn from the central bank than anything else.

Extending this further, there’s another permutation in the future which could occur in that a Fed rate cut may actually be seen as negative for equities due to the decision to carry it out seeming like a vote of no confidence in the economy under present conditions. While you can argue all these points back and forth, the most important thing for traders is price action and along these lines the daily high of 2825 is a key level to watch. On the downside 2805 was last night’s close and given the recent data it would not be at all surprising to see this gap fill, but the question then becomes whether buyers step in around that level. A move back below 2800 would be a signal that the selling could really take hold and on a daily closing basis this remains a potential line in the sand.

Finally, there’s another piece of data out this afternoon which could be telling for US stocks with the ISM non-manufacturing PMI due at 3PM. 50.9 expected after 50.9 prior.

The S&P500 has failed on its first attempt to push up past the 41.4% fib retracement of the larger decline at 2825 and this is now potentially key resistance. 2805 is Tuesday’s cash close level while 2800 could be seen as support below there. Source: xStation