Markets Today: Jump (for my love)

Jump (for my love) was a classic 1980s hit by the Pointer Sisters and one suspects would be particularly high in the Spotify lists of several Fed officials after last night’s weaker than expected Manufacturing ISM.

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Jump (for my love) was a classic 1980s hit by the Pointer Sisters and one suspects would be particularly high in the Spotify lists of several Fed officials after last night’s weaker than expected Manufacturing ISM. The weak result raises the bar for tonight’s Payrolls to prompt Fed action in September and all eyes will be on Payrolls tonight.

Overnight, the weaker than expected US Manufacturing ISM saw a slight paring back of US Fed Rate hike expectations, broad US dollar weakness and lower bond yields; equities were little changed. The ISM fell to 49.4 (from 52.6) and was below expectations of a 52.0 print. The details do reveal some anomalies that could cast some suspicion on the extent of weakness with the outcome driven by steep declines in new orders (down 7.8 points) and production (down 5.8 points). For those looking for a case not to hike rates in the near term, it very much raises the bar for tonight’s Payrolls to prompt Fed action.

It’s also worth remembering ‘one swallow does not a summer make’ with other less high profile US data positive. US Jobless Claims remained low and stable at 263k (slightly below the 265k consensus forecast), while Unit Labour Costs (a key input to forecasts of inflation) were revised higher to 4.3% (from 2.0%) alongside higher hourly compensation costs (revised to 3.7% from 1.5%). That may go some way into justifying Cleveland Fed President Mester’s (FOMC voter) remarks who spoke after the ISM release: “If you have a forecast and inflation is moving up to your target and you’re at full employment, then it seems like a gradual increase from very low interest rate is pretty compelling…Pre-emptiveness is important”. The market is currently pricing 37.5% chance of a hike in September and 75% by December.

In terms of specific market moves it was one of broad US dollar weakness (down 0.4% across the board). The British Pound was the outperformer amongst G10 currencies up 1% to 1.3270 following a much better than expected UK PMI (53.3 v expectation of 49.0). Next up was the Aussie and the Kiwi up 0.5% and 0.4% respectively, with much of that strength in the Asian session driven by stronger Australian non-mining investment intentions, China’s manufacturing PMI, and stronger NZ export figures. The Euro also finished the day 0.4% higher.

While US Bond Yields were only down 1.2 basis points on the day, that disguises some hefty intraday moves, with yields initially trading higher to 1.62% (helped along by higher Unit Labour Costs and the better UK PMI), before the weak US Manufacturing ISM which saw yields fall to 1.55%. Amongst the other majors, German Bund yields were little changed at ‑0.07% while Gilt yields rose 2.6% to 0.67.

Major stock indexes were little changed with the Euro Stoxx down 0.2%, and the S&P500 unchanged. Oil continues to come under sustained weakness, with WTI down 3.2% for the day to $43.28. That comes after rising inventories and remarks by Russia that indicated there was no need for an output freeze.

Coming Up

There is nothing on the domestic calendar and the main game internationally will be US Non-farm Payrolls tonight along with other components of the employment report. In the US we also have a Fed speaker – Lacker the first Fed speaker after the Payrolls number.

For Payrolls tonight, the Atlanta Fed’s Job Calculator suggests around 118k payrolls are required to keep the unemployment rate unchanged. That suggests a payrolls print north of 120k would be enough for the Fed to hike rates. The market is currently expecting 180k jobs and for the unemployment rate to decline to 4.8% from 4.9%. It is also worth noting that a key input to most economist forecasts of Payrolls – the Non-manufacturing ISM Employment Index – is not at hand this month. Of the available data, the NFIB Small Business Jobs Report for August was mixed with an increase in job openings, but a reduction in plans to increase employment.

Finally the US also has the Trade Balance where consensus is for a slight improvement to -$41.5bn in July from -$44.5bn. Given interest in all things Brexit related, the UK Construction PMI might also be worth looking at given the outperformance of the British manufacturing sector last night.

Overnight

On global stock markets, the S&P 500 was -0.18%. Bond markets saw US 10-years -1.19bp to 1.57%. In commodities, Brent crude oil -2.82% to $45.57, gold+0.4% to $1,314, iron ore -0.2% to $58.86. AUD is at 0.7553 and the range since yesterday 5pm Sydney time is 0.7508 to 0.7558.

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