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The week that was:
Last week the results of the monthly job report were released. There were very few unemployed people, and there were many job positions available. That means that the job market is very strong. However, that is bad news for inflation.
For example, a tech company has ten job positions available for software programming. If they don't get any job applications, they have no choice but to start raising their salaries to attract people to their job openings. As this is happening to many companies, it is increasing wage inflation. People are demanding and getting higher salaries for the same work. This means they have more money to spend, which increases demand for goods and drives up inflation. The better the job market, the worse the inflation, and vice versa.
This is not good news for the Fed. Especially after the chairman's statement on peaking inflation last week. The inflation data for July is coming out on Wednesday, and if the results are bad, the combination of that and the strong job market will heavily impact the market in a negative way. The Fed would be forced to raise interest rates quite aggressively.
As I mentioned in the last newsletter, the market's over-optimism can cause consequences. The job market results are already a very bad sign that is starting to prove the Fed's statement wrong. I think that the main cause for the market's recent rise is the optimism that inflation has peaked. The market thinks if inflation has peaked and will gradually lessen, then the Fed will not have to raise rates as much. The inflation data will be very crucial for the better or the worse. It will be very good for the market if inflation is shown to be lower, but it is more likely that inflation will be high.
This is a 1 year chart of the S&P 500 also called SPY. The SPY closed at $413 today. The market has tried several times to go above this level but has failed. The blue line represents the level of resistance, meaning that the market has tried to break through it, but has been failing. The green circles represent the eight times the market has tried, but failed to go above that level. The eighth circle represents the current one. Every time, the value ranged from $412 to $417.
The last three times this happened, it all happened in a very short span of time, and when it failed to break through, the market experienced a big dip. The market's next big move will likely depend on the results of the inflation data. If it is good, the market will probably break that resistance and go higher. If it is not good, I expect to see the market fall down significantly, similar to the last time the market tried to break this resistance.
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