The S&P500 jumped nearly 2% to cross above its 200 DMA and the Nasdaq 100 gained 1.74% to test its 50 DMA to the upside as the rally in US Treasuries extended for another day.
Apple is likely to slow the rally in the major U.S. indices. Apple shares fell as much as 4% in after-hours trading after the company said sluggish Chinese demand for iPhones hurt revenue. Sales of Mac computers also fell below $1 billion. Apple’s revenue fell for the fourth consecutive quarter, the longest such decline in 22 years.
As a result, Apple stock could fall as low as $170 per share, the critical 38.2% Fibonacci retracement level that, if breached, would put Apple into the medium-term bearish consolidation zone. The only thing that could save Apple from falling into dark waters is… a further rally in US bonds and a further fall in yields.
The U.S. bond rally exploded this week as the U.S. Treasury said it would borrow slightly less than previously thought, and slightly less in 3-, 10- and 30-year notes. The Federal Reserve (Fed) hinted that rate hikes may be coming to an end, as the recent rise in US long-term yields has helped them tighten financial conditions without the need for another rate hike.
But if yields continue to fall at this pace, Fed expectations will quickly become hawkish and depending on how far the market goes, the Fed may be forced to raise rates again in December or January to keep financial conditions tight enough.
US growth is strong and the labor market remains healthy. The Fed believes that solid labor force participation and immigration explain the resilience of the labor market. According to the consensus of analyst estimates on Bloomberg, the U.S. economy is expected to have added 180,000 nonfarm jobs, the unemployment rate is seen holding steady at around 3.8%, and wage growth may have slowed to 4% from 4.2% on an annual basis.
Any strength in the payroll or wage growth data could bring bond traders back down to earth and remind them that if the U.S. labor market – and the economy – remains this strong, the Fed could turn hawkish again. But strong jobs data in a context of higher supply is not necessarily inflationary.
UK outlook gloomy
The Bank of England (BoE) left interest rates unchanged for the second month in a row yesterday. Some MPC members voted for a 25bp hike to make sure the pause wasn’t premature, but they all said the same thing: it’s too early to talk about rate cuts.
The good news is that inflation could fall below 5% in October and somewhere near 4.5% by the end of the year. But at 4.5-5%, inflation is still more than twice the BoE’s policy target. So the BOE can’t promise that it’s done hiking. It can only hope that the cumulative impact of higher rates on the economy will do the rest of the heavy lifting.
In the best-case scenario, the UK’s gloomy economic outlook – which seems to be getting gloomier by the month – weighs on demand and brings inflation down. At worst, inflation remains sticky while the economy sinks into recession. In either case, the BoE wouldn’t hike. Expectations of another hike have fallen to 1 in 3, and markets are now fully pricing in 3 quarter-point cuts by the end of 2024. The weaker economic outlook and softening BoE expectations are ominous for Sterling bulls against both the US Dollar and the Euro.