Time to Buy the Dollar?

Stocks moved lower today as yields rose. The Dow, S&P, and Nasdaq Composite all fell through the close despite hinting at an intraday rally several times early into the trading session. The 10-year Treasury yield advanced to 3.80% as well while the dollar climbed, pushing down on equities.

And though stocks didn’t plummet today, investors remain concerned that they will. The last “dead cat bounce” came in mid-September before stocks rushed lower.

Does a similar fate await the market this time around?

“Few are convinced that the recent move is more than a bear market rally, with skepticism over the durability,” explained Nationwide’s Mark Hackett.

“Confidence remains weak, ranging from CEOs, small businesses, consumers, and investors. Universal pessimism is bullish from a contrarian perspective, though timing of the pendulum swing is difficult to predict.”

Energy stocks had a good day, however, following OPEC’s surprise production cut from yesterday morning. The group of nations plans on reducing output by 2 million barrels per day below baseline. This caused oil futures to spike, lifting energy names in the process. Rising energy costs threaten to dismantle the recent bear market rally.

So too does this morning’s stronger-than-expected ADP labor data. ADP said that the US added 208,000 private payrolls in September, beating the 200,000 consensus estimate. The Bureau of Labor Statistics (BLS) releases its September jobs report this Friday.

A strong number would be met with selling as it would weaken the Fed’s case to pivot to a more dovish stance.

However, initial jobless claims from last week also came in this morning, totaling 219,000. That’s more than the 203,000 expected and it gave bulls hope for a weak jobs report, as did Tuesday’s Job Openings and Labor Turnover Survey (JOLTS), which showed that job vacancies fell by 1.1 million to a total of 10.1 million jobs in August.

“Prior to non-farm payrolls (NFP) this Friday and CPI next Wednesday, the market has been oscillating between the ‘hawkish Fed’ and ‘Fed pivot’ narrative,” wrote analysts at JPMorgan. The bank’s strategists added that today’s data from ADP “proves the economy still remains strong and therefore weakens the hope of a near-term pivot from the Fed.”

Keep in mind that the strong ADP showing doesn’t necessarily mean we’ll see a robust jobs report this Friday. ADP and the BLS have reported wildly different numbers on occasion. Usually, ADP has been proven fairly accurate following revisions from the BLS. That was the case in 2021 when the BLS overestimated the number of payrolls by roughly 2.5 million – an unprecedented number – over the course of the year.

We’ve said in the past that the BLS data post-Covid is completely unreliable as evidenced by the bureau’s historic revisions. That will continue to be the case for quite some time.

But the Fed thinks it’s all real. As a result, the market is forced to treat each jobs report as if it were 100% accurate, too.

It’s a total farce, of course, but this Friday’s jobs data could potentially determine whether the Fed pivots or not even though it will be massively revised come January 2023.

Regardless of what happens Friday, the US dollar looks ready to rally as represented by the Invesco US Dollar Fund ETF (NYSE: UUP). UUP traded higher today, closing almost above the 10-day moving average while setting a higher low.

The stochastic indicator shows that, following the dollar’s recent selloff relative to other currencies, there’s plenty of room to run higher.

For those reasons, it might make sense to take UUP long with a trade trigger of $30.52, above today’s high, as the general market looks to recover from this afternoon’s losses.


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