The US ADP employment report last night printed +200k, seemingly confirming that the US economy continues to create more than enough jobs each month to keep the unemployment rate trending down to – and through – the so-called NAIRU rate (below which further labour market strength risks accelerating inflation). ADP also confirms that in 2015 to date, the US manufacturing sector has seen net job losses, following 5 consecutive years of gains since 2009. Alongside, six of the regional Feds who produce monthly manufacturing sector surveys (New York, Philadelphia, Richmond, Kansas City, Dallas and Chicago) all report their respective manufacturing sector to be contracting – again for the first time since 2009.

Of course, the response from Fed officials and many private economists is that since manufacturing only represents about 12% of the US economy, it doesn’t really matter and that policy is made for the entire economy which continues to pump out the aforementioned ~200k new jobs each month. But if US interest rates were not currently near zero, you’d seriously question why anything thinks the Fed would have its finger evenly remotely on the interest rates trigger at this juncture. At the same time, it’s worth noting that manufacturing recession is more a global than US-centric phenomenon (Japan, China to name but two of the world’s other big four economies) and looks to be more symptomatic of a deficiency in global demand than a strong dollar. But that doesn’t make the case for higher interest rates any more compelling.

Fed speakers added nothing to the Fed policy debate overnight, Fed chair Yellen saying only that the economy had seen ‘significant improvement’ since the crisis. Thanks Janet. Other economic news of note last night included confirmation – after Tuesday’s weaker German inflation data – that the Eurozone slipped back into deflation in September (-0.1%) albeit the core measure that now gets more prominence at the ECB, was steady at 0.9%. UK GDP was unrevised at 0.7% in Q2 through the year-on-year estimate was lowered to 2.4% from 2.6%.

For markets, month/quarter end flows look to have been the dominant influence across asset classes. This has allowed for a decent rally in global equities and where most indices are showing gains either side of 2% and additional demand for US Treasuries that sees 10-year yields closing out the month on their lows (2.03%). FX performance has been mixed. 4pm fixing-related flows look to have provided support for the JPY but net supply of EUR, GBP and AUD. On the latter, the IMF has just come out with its annual review of the Australian economy in which it flags risk of a hard landing for the housing market and argues the Australian dollar is ‘still on the strong side’ and ‘may weaken further as the Fed removes stimulus’.

It says the RBA could ease further if growth rebound disappoints. This is all fully consistent with the IMF’s current innate pessimism and broader warnings about risks to the EM world in general and commodity exporters in particular.

Coming Up

China begins its National Day holiday week today (markets are closed through next Thursday, as is Hong Kong today) but this isn’t preventing the release of first the official China PMIs covering both manufacturing and services (11:00 AEST), the final Caixin manufacturing series and also the latter’s sole services sole services and composite readings (all 11:45 AEST). The official manufacturing reading is expected unchanged at 49.7, and the Caixin version unchanged on the 47.0 ‘flash’ estimate.

Weaker than expected official readings will likely add to market conviction that USD/CNY will be permitted to resume a firmer trend when Chinese markets return later next week. If so, that can in the interim put fresh downward pressure on EM and commodity currencies.

Also of interest during our time zone will be the Q3 Japanese Tankan survey, and which comes on the heels of yesterday’s poor industrial production and retail sales prints. Rightly or wrongly (probably wrongly as far as October is concerned at least) a weak overall Tankan will add to thoughts of more BoJ policy easing and could therefore see the yen weaker.

The economic data action continues into Europe and the US sessions, with the UK manufacturing PMI (expected to show a small fall to 51.3 from 51.5) and the US ISM, the latter seen holding stady at 53.0.

Fed speakers remain thick on the ground, with Lael Brainard scheduled for 10:15 AEST today and Williams and Lockhart tonight. If any of them talk directly about Fed policy, they are likely to be on message, i.e., that October and December are both ‘live’ for possible ‘lift-off’.

Overnight

• On global stock markets, the S&P 500 was +1.90%. Bond markets saw US 10-years -1.23bp to 2.04%. On commodity markets, Brent crude oil +0.60% to $48.52, gold-1.0% to $1,116, iron ore +0.5% to $56.32. AUD is at 0.7016 and the range was 0.6983 to 0.7038.

• US ADP employment 200k (190kE, 190kP)
• EZ CPI -0.1% (0.0%E, +0.1%P)
• UK final Q2 GDP 0.7% Q/Q (0.7%E, 0.7%P)
• UK final Q2 GDP 2.4% Y/Y (2.6%E, 2.6%P)
• Canada July GDP 0.3% M/M (0.2%E, 0.5%P)
• US Chicago PMI 48.7 (53.0E, 54.4 P)

For full analysis, download report:

• Markets Today 1 October 2015 (PDF,284KB)

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