Stocks, Bonds, USD: What Rate Hike?

The US July jobs report was strong, or at least clearly better than the June report. 215K in NFP, 2.1% average hourly earnings y/y, unemployment rate unchanged at 5.3% and the participation rate also unchanged at 62.6%. The big rally in the US dollar was completely eroded, with EURUSD clawing back all of the 120-pips it lost immediately after the release. The only currencies not to end higher against the USD were CHF (due to renewed SNB jawboning), CAD (disappointing CAD jobs) and GBP and SEK. 

Yields fall for 4th straight week

Our interpretation of the US jobs report is that it is strong enough to open the door open for a September rate hike (in the event that August figures are strong across the board), but not sufficiently strong to eliminate the debate, and thereby maintaining the probability for the Fed to hold in September and wait until December, for which more data will be required.

Consequently, US bond yields fall for the 4^th straight week, testing below their 55 and 200-week moving averages. The 2.15% support should likely hold for now, but if the bond market is supposedly pricing higher chances for a September hike, then falling yields imply either the bond market does not agree, or/and it is anticipating slowing growth and weakening inflation ahead.

And what would happen to the existing bullishness in bonds by speculators, highlighted in our piece from earlier this week.

Into the weeklies for stock indices

It's time to ignore the daily chart and turn to the weeklies for the Dow Jones Industrials Index and S&P500.  While the S&P500 retests its 200-DMA, the DJIA has already fallen below both its 55 and 200-DMA, trading 3.0% below the 200-DMA, the farthest away since November 2012—the year when Apple began a 45% decline off its highs. The DJIA is also already trading below its 55-WMA, dragged down by Chevron, Caterpillar, Exxon and Dupont being the worst performer in the index over the last 4 weeks.

Whether this means the next stop in the S&P500 is 2048, or the next stop in the DJIA is near its 100-WMA at 16,956, remains to be seen. Interestingly, both levels correspond to key levels of support. As long as hawkish members of the Fed continue to hint at rising odds of an autumn rate hike, stocks will not be helped.

This month will be filled with muscle-flexing speeches from most FOMC members. And stock won't like it.