The S&P500 rejected the important resistance zone around 4010-4020 and has been in a downtrend ever since.
US stocks continued to fall yesterday amid concerns of a sharp economic slowdown after negative retail sales data was released on Wednesday.
Treasury bond yields remained at the lowest levels of the last four months, with the 10-year bond below 3.40%. This is a typical pattern of capital flows as investors look for safe assets like Treasury bonds in a high-uncertainty environment where they are paying less attention to inflation and interest rate data and more attention to data for economic growth.
The fully inverted interest rate curve indicates that fixed-income investors believe the Fed will be forced to cut interest rates after this period of rate hikes, possibly as soon as the end of this year, due to the economy's serious deterioration.
This is why, after publishing yesterday the number of building permits and the Philadelphia Fed manufacturing index, both of which showed declines in manufacturing activity and the real estate sector, the stock markets reacted negatively.
Until now, weak economic data was received positively by risk assets; "bad news is good news" since this implied a lessened need for interest rate hikes. But everything indicates that this investor approach has changed, and now the fear of a serious recession prevails over the evolution of interest rates.
However, employment data contradicts this view, at least for now. Yesterday, the initial jobless claims figure was lower than expected, below 200k. This indicates that the labor market is still very tight, which in principle, is not a sign that the economy is slowing down, although employment is not a leading indicator. The effects of a weaker economy should be visible with some delay.
In short, we are entering a period where uncertainty is going to predominate in the markets, and in which economic growth data will set the course for financial assets.
The technical scenario also contributes to the price action of consolidation or corrections. The S&P500 rejected the important resistance zone around 4010-4020, where the downtrend line of the entire decline of the index since the beginning of 2022 passes and where the 200-day exponential moving average is located. Therefore, this level is extremely important and marks the difference between a continuing bear market and the start of a bull market.
Sources: Bloomberg, Reuters
