US stock indices were firmer across the board yesterday in a move which took the Dow, S&P 500 and NASDAQ 100 to new all-time closing highs. The NASDAQ added 0.4%, while the Dow and S&P gained 0.1% and 0.3% respectively. The small cap, domestically focused Russell 2000 ended 0.2% higher, but remained shy of its own all-time high.
Source: TN Trader
These gains came even as the government shutdown began, and labour data came in soft. Investors largely looked past the shutdown, betting it would be short-lived and cause limited economic damage. But the shutdown means that neither today’s weekly Unemployment Claims nor tomorrow’s BLS Non-Farm Payroll report will be published. This means that vital data on the state of the US labour market will now be missing. This can only make life harder for the Federal Reserve ahead of its next monetary policy meeting at the end of this month.
The Fed has made it clear recently that it is concerned about the jobs market following two disastrous BLS payroll reports, along with some thumping negative revisions. Yesterday, the latest monthly update from the privately produced ADP payroll report showed an unexpected loss of 32,000 jobs. Analysts had been expecting a gain of 52,000. On top of this, the previous data was revised sharply down to minus 3,000 from an initial gain of 54,000 jobs.
Investors responded positively, working on the assumption that ’bad news is good news’. The theory behind it is that the Fed is now more likely to cut rates twice before year-end due to growing concerns about the state of the labour market. That may be the case. But it could also mean that the central bank holds off from cutting this month if FOMC members feel they have a lack of clarity, given the missing data releases.
Yesterday’s shutdown took effect after Congress failed to reach a funding deal, with Democrats pushing for extensions of healthcare tax credits and Republicans refusing to bend. The Senate will not return until Friday due to Yom Kippur, further delaying progress. Despite many traders brushing off concerns over the shutdown, there’s a serious risk of the standoff dragging on. President Trump’s threat of furloughed workers having their jobs cut permanently has also added to unease, underscoring concerns around the labour market.
Technically, there’s no reason to see why the current rally in equities can’t extend further. The major indices have been pushing higher in a slow but steady grind since April, as markets recovered from their tariff-induced swoon. The daily MACDs across all the majors reflect this move and are far from being overbought. Nevertheless, traders should take care as the markets push up further into this rarified atmosphere. The air is very thin up here, and the risks of a significant pullback increase with every move higher.
