Global markets are trading flat to slightly higher this morning continuing Thursdays afternoon rebound. Al eyes are on today's US nonfarm payrolls report which could spark significant trading activity heading into a long weekend for the US and Canada.
US indices, the Dax and major currencies are all holding steady so far. The FTSE and WTI are both up about 0.8%.
Markets appear to be tightening like a spring, ready to snap into action on today's news, particularly its implications for interest rates and corporate earnings.
Most of the time since the 2009 bear market bottom, equity traders have been playing the “bad news is good news” game, treating poor economic news as a sign that central banks would need to put more liquidity/cheap money into the financial system and running up stocks.
This now appears to be changing with traders initially treating yesterday's positive PMI reports as good news for stocks and currencies, and weak PMI reports as bad news for stocks and commodities.
The US ISM report was a big disappointment with both the headline PMI and the new orders component surprisingly falling under 50 into contraction territory. Even though the Markit PMI report held steady near 52 and did not confirm the RSI, traders took this as an indication that the Fed could hold off on a September rate hike and sent the US Dollar lower. US stocks, didn’t get their usual bad news liquidity boost this time. Instead, stocks dropped off significantly in the wake of the news although they made a lot of it back in the afternoon.
The reason for the drop is that with NY Fed President Dudley having reminded markets a couple of weeks ago that a Fed rate hike at this point in the cycle is a vote of confidence in the economy, a declining PMI suggests a weaker economy and a weaker environment for corporate earnings.
Fed Vice Chair Fischer recently suggested the big numbers were aligning toward favouring a rate increase. It's questionable whether soft survey data like PMI would be enough to change anyone's mind but it could be enough to create enough doubt to delay.
The stage is now set for today's big nonfarm payrolls report to settle the score as it's one of the last big numbers that could potentially influence the decision at this month’s Fed meeting. With the US approaching full employment, FOMC members have been downplaying the level of job creation needed to make a hawkish move. As such, a 200K+ report would likely clinch a September rate increase, a 100K-200K increase in payrolls would mean a coin toss at the meeting, while below 100K could give the Fed a reason to hold off for now and signal toward a December increase.
The street is expecting nonfarm payrolls to increase 180K down from 255K last month but similar to yesterday’s 177K growth in ADP payrolls. I’m thinking 210K including a 10K downward revision to last month.
Data from the UK and Europe has been encouraging as UK Construction PMI popped up to 49.2 from 45.9 indicating a strong summer rebound from brief Brexit jitters as the outlandish cries of Brexit doom from the campaign become more hillarious by the day. Italy posted stronger than expected GDP numbers, also a positive sign.
Today also brings US and Canada trade balances and an employment report Spain which may attract attention after a better than expected Spanish manufacturing PMI report propelled a breakout for the IBEX today. Canadian employment numbers don’t come out until next Friday.