Stocks edged higher last week, with the S&P 500 hitting multiple record highs as investors welcomed signs of easing inflation alongside steady economic growth.
Looking ahead, all eyes will be on the September jobs report for further insights into the pace of the labor market’s cooldown. Key updates on job openings, services and manufacturing activity are also on the radar.
Recent data on the Fed’s preferred inflation gauge indicated a continued cooling of price increases, drawing attention to the central bank’s second mandate: maximum employment.
Signs of a Slowdown Becoming Clearer?
The unemployment rate has steadily climbed throughout 2024, now sitting at 4.2%, its highest level in nearly three years. Job gains have also slowed, with the past two months delivering the weakest growth this year. July’s job openings reached their lowest since early 2021.
As Friday’s October jobs report approaches, the key question is how quickly the labor market is cooling. Wall Street expects a gradual slowdown rather than a sharp contraction, with forecasts suggesting 130,000 jobs added in September and unemployment holding at 4.2%, per Bloomberg data. In August, the economy added 142,000 jobs while the unemployment rate dropped to 4.2%.
Volatility Set to Rise Ahead of Key Labor Market Data
This past week didn’t go as expected despite reserve balances falling to around $3.13 trillion. The JPM Equity Fund collar had too much of an impact, causing the index to get stuck between 5725 and 5750, preventing any meaningful breakout.
That was one reason the market gave back all of its gains on Thursday despite the strong open.
However, the collar will be removed today, and a new one will be created, eliminating the mean-reverting forces tied to the 5750 level. This should also result in a rise in implied volatility, especially with the upcoming data being more crucial than ever.
On top of that, Japan equity futures dropped sharply on Friday following the announcement of the new Prime Minister, who is expected to be more in favor of normalizing rates and pursuing a more balanced budget. The news came after the close of regular trading, with Nikkei futures in New York down about 6% by Friday evening.
Japan’s market can be unpredictable. I’ve traded in Japan during critical moments, such as the financial crisis, the Fukushima disaster in 2011, and the election of Abe in 2012. The market can move quickly and take unexpected turns. So, while futures were down 6% in after-hours trading, I’m very curious to see how it unfolds, and I’ll be closely watching the market - especially the yen.
USD/JPY, USD/CAD Price Action to Give Clues on S&P 500's Next Direction
The yen strengthened materially as markets bet on the opposition leader winning the prime minister position, leaving them wrong. This led to the USD/JPY strengthening by 1.8% and the CAD/JPY by 2.1%.
These were significant moves, and in the process, it appears that the USD/JPY fell back to its 20-day moving average and its 10-day exponential moving average.
More importantly, it also seems to have broken below a bear flag, setting up a test of support at 141.85 and then 141. Once 141 is broken, the odds of a move down to 138 or so seem to increase significantly.
The same can be said for the CAD/JPY, which appears to be on a short-term path to around 103, with the potential to head to 100.
This has significant implications for U.S. markets. If USD/JPY heads toward 141 and USD/CAD moves toward 103, it would mean USD/CAD weakens to 1.369 from its current 1.351. This would suggest that USD/CAD has potentially “bottomed.”
As it weakens further, thus turning higher, it signals that the SPX may have put in a short-term top and is likely to move lower.
It would also probably mean a higher VIX index, as the USD/CAD has a strong relationship with the VIX. By the way, the lines drawn in the SPX/USD/CAD chart above have been unaltered in the chart below for the USD/CAD vs. the VIX.
Meanwhile, Nvidia (NASDAQ:NVDA) will provide critical insights into market conditions this week. A lower Nvidia would likely indicate that the yen carry trade is unwinding. Nvidia has touched the upper trend line three times and is currently testing the 10-day exponential moving average. A potential touch of the lower trend line comes in around $111, which is something to keep an eye on.
I also believe that Wingstop (NASDAQ:WING) is another carry trade play, as the stock has mirrored shifts in the USD/JPY since October 2023. The stock appears to be forming a potential double top, with gaps to fill at $395 and $366.