Below trend growth to continue
At the start of a new quarter, markets are struggling for a clear frame of reference, not yet sure whether bad economic news is good news for risk if it keeps the Fed at bay for longer, or is bad news because it serves to amplify concerns about the overall health of the global economy.
At the start of a new quarter, markets are struggling for a clear frame of reference, not yet sure whether bad economic news is good news for risk if it keeps the Fed at bay for longer, or is bad news because it serves to amplify concerns about the overall health of the global economy. Or indeed, whether the Fed getting on with the job of getting rates off the zero lower bound is good or bad news for risk.
After yesterday’s very mild upside surprises in China manufacturing PMIs (albeit stuck at depressed levels) proved to be somewhat cathartic (for risk, emerging market and the AUD) last night’s US manufacturing ISM initially had a depressing impact on US equities, which had been rallying into the data. At 50.2 down from 51.1 and 50.6 expected, the data confirmed what we pretty much knew from the various regional Fed manufacturing surveys – which is that the manufacturing sector has stalled. Equities subsequently recovered with the S&P closing with a small (0.2%) gain while 10 year Treasuries pulled up from their immediate post-ISM intra-day lows of 2.01 to close at 2.04%.
The glass half full view of the economy (well 85% full actually) is that the non-manufacturing economy is going gangbusters and this is what is driving the ongoing tightening in labour market conditions. In this respect the little noticed NFIB (small business) hiring plan index published on Wednesday night held strong at 12.0 (just above its year-to-date average). Initial jobless claims meanwhile, though up to 277k from 267k last night, remain fully consistent with ongoing strong jobs growth/falling unemployment. Let’s see what tonight brings.
Fed official meanwhile have done their best top keep the 2015 tightening door wide open. Richmond Fed President Lacker (who dissented in favour of an immediate rate rise last month) said that an October rate rise is possible and that he’s concerned the Fed could move too slowly. San Francisco Fed President Williams meanwhile also says October is live but adds that the global slowdown poses risks to the US economy. He says it won’t take much to tip the balance, but adds that the Fed could cut rates after raising them, if conditions worsen. Bring on the next easing cycle
Other economic news saw the UK manufacturing PMI steady at 51.5 and the Eurozone equivalent unchanged at 52.0 from the ‘flash’ estimate. The next set of EZ figures will be keenly awaited for evidence of the initial impact of the VW diesel emissions revelations.
In currencies, it’s been a night without much to say for itself, other than that USD/JPY once again lost its grip on the ¥120 handle following Bloomberg news headlines that the ‘BOJ is said to see little immediate ned for adding stimulus’. With many in the leveraged FX community apparently geared up for something new from the BoJ this month (they meet twice in October, including next week) the risk of disappointment appears to be quite high. The AUD meanwhile, failed to build on yesterday’s APAC session gains to just above 0.7080, giving back half a cent in the NY afternoon and taking the AUD/NZD cross back below 1.10.
US payrolls day has come round again, but amid a still lingering sense that it is global market/economic conditions staying the Fed’s hand at present, tonight’s September numbers might not be completely crucial for upcoming FOMC deliberations. Much stronger or weaker than expected data could of course instantly challenge that view. Consensus looks for a near-200k gain in payrolls, steady unemployment rate at 5.1% and an uptick in annual average earnings growth to 2.4% from 2.2%. We also need to be on guard for potential revision to last month’s data first reported at 173k). August numbers have been prone to significant upward revision in recent years.
Fed Vice-Chair Stanley Fischer and St. Louis Fed President Bullard are both due to speak post-payrolls, so we can hopefully look forward to some almost real-time judgement on the numbers and which Janet Yellen continues to claim are singularly the most important input to the Fed’s decision making process.
Ahead of US payrolls and what promises to be a very warm three day weekend for those of us in New South Wales at least (sorry) we get to hear from ECB President Draghi who is due to deliver a speech in New York at 11:30 AEST.
Domestically, we have August retail sales data. Retail sales values continue to grow in trend terms and we expect this to be also evident in the August report, looking for a return to monthly growth after last month’s 0.1% dip that broke a long sequence of monthly gains. Business conditions in the retail industry have not only continued to make some gains but stepped up another notch in August. While this may not map one-to-one with the ABS series, it’s a reminder that retailers are reporting somewhat better trading conditions overall, notwithstanding what the monthly data point to.
NAB looks for growth of 0.3% in August; we are also mindful that fruit and vegetable prices dipped 0.5% in August, crimping the value of food retailing sales, but still likely resulted in strong volumes growth.
On global stock markets, the S&P 500 was +0.20%. Bond markets saw US 10-years +0.70bp to 2.04%. On commodity markets, Brent crude oil -0.89% to $47.94, gold-0.1% to $1,114, iron ore -0.5% to $56.04. AUD is at 0.7028 and the range was 0.6998 to 0.7085.
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