Lowest reading for ADP since March 2023. (-32k vs. 51k expected) Since this is only focused on the private sector, this might not be the best gauge of labor market data from BLS, but this downside surprise is resulting in a very strong Treasury rally across the curve, and ^TNX is lower by 5 bps, and Yields look to have begun their pullback to test and break September lows. (Last month’s data was also revised down sharply from 54k to -3k. I like being long 2, 5, 10, and 30-year Treasuries, but 2-year yields likely pull back the quickest technically as the yield curve steepens. There’s now a 95% chance of a rate cut in late October as priced by Fed Fund futures contracts. Treasuries look likely to rally for most of October, so I expect technically that yields will continue to drop sharply.
US Government Bonds 10 YR Yield
USDJPY Dollar/Yen has also begun to pull back sharply, which started four days ago when the threat of a government shutdown started to appear like more of a reality. Risk reversals are skewed sharply bullish, and this positive risk positioning suggests that the Yen’s recent rally very well could be set to continue as a government shutdown draws flows away from the US Dollar and into the Yen and Euro. Technically, this last week’s drop in USD/JPY looks negative for the US Dollar vs. Yen, and I expect a coming test of 145.46. Any break of this level would signify a meaningful breakdown for Dollar/Yen and should result in the Yen rallying sharply back higher up to test the Spring highs vs. the US Dollar of 139.88. My view is the BOJ is readying for an October hike, and the Yen is likely to rally as a safe haven, given the government shutdown now having become a reality.
U.S. Dollar / Japanese Yen
While it might seem odd that the Equity market might rally as economic data gets weaker and a government shutdown gets underway, that’s exactly what technicals suggest at the moment. Recent Equity strength in the wake of the Government shutdown possibilities looks set to gain ground as the decline in Treasury yields on weaker data starts to reinforce the strong likelihood (based on Fed Funds futures pricing) of a near 100% certainty of a late October rate cut. (Keep in mind that Jobless Claims data might not be released this week, given the government shutdown.) Early S&P Futures weakness of -0.50% overnight has improved to just -0.35% into today’s Market open, and yesterday’s strong close likely will push even further to the upside to test and exceed 6700 en route to near 6749. This level would allow the minor hourly swing of the last 24 hours to be equal in price terms to the one that began on 9/25 as an initial target for this rally. Cyclically, the next 1-2 weeks look likely to be bullish for US Equities, and it will be important to keep a close eye on market breadth between now and mid-October.
S&P 500 Index
Note that the 14 Govt shutdowns since 1981, only four of these were longer than 5 days in length, and to Tom Lee’s point about these Shutdowns not really proving all that damaging to Equity markets, most times they were truly not, outside of 2018, which proved to be the largest in terms of Equity losses from October into December of that year. In sort of a “Pavlovian” response to this year’s Shutdown, we’ve seen USDJPY begin to decline, and history shows that, actually, it’s been the Euro and Canadian Dollar historically that have gained even more ground than the Yen in past Shutdowns. I expect to see further US Dollar weakness along with Treasury yield weakness in the weeks to come.
Euro Stands to Gain From US Shutdown
I’ve spent a few days in Dubai at the CMT Global Investment Summit this week, and one of the few themes that everyone is talking about is how bullish Gold is from a technical and fundamental perspective. That’s scary to me, as no one was discussing this when Gold bottomed three years ago in 2022. Many are mentioning macro themes to back up their bullishness, like 1) “Govt Shutdowns being bullish for Gold, 2) Lack of Fed independence, 3) Federal Bank buying, 4) Declining Real rates, and 5) Fiscal uncertainty and concerns. While I agree with all these points, Gold is very, very stretched here, and I recommend using a 5-day moving average now on all long positions, looking to exit as this moving average is undercut. This year’s 50% rally has barely had a decline of more than 3%, making this very different than 2023, when a number of 5-6% corrections happened as part of this rise. Using DeMark theory, there will be counter-trend Exhaustion “13 countdown signals” (Sells) potentially within 3 trading days, while the Weekly data could come into alignment within 2-3 weeks on both Gold and Silver. I’ve resisted suggesting to trim gains based on Daily DeMark signals in the past, but I suspect we could have a short-term peak by the end of this week, given the parabolic move, if/when DeMark daily TD 13 signals appear on TD Sequential. Overall, I expect GLD 0.02% to likely have a target between 360-365, and Spot Gold might hit $4k before showing some backing off. However, normally, I have suggested in the past that long-term positions might be better suited to await weekly signals before growing too defensive, and these continue to align towards mid-October.
Gold SPDR – GLD
