DIGEST – Stocks ended yesterday in the red after a chunky intraday reversal despite a solid-ish September jobs report, as risk appetite remains on shaky ground. Today, ‘flash’ PMIs highlight the data calendar.
WHERE WE STAND – What on earth happened there then!?
It seemed, for a while, yesterday that everything was right with the world once again. Nvidia delivered strong earnings on Wednesday, reigniting some enthusiasm around the AI theme, and the September jobs report was a solid-ish one, albeit a report that had a few blots on the copybook under the surface.
Stocks were, unsurprisingly, trading comfortably in the green on the back of all that, before a wave of midday selling pressure hit the market – rather ironically coinciding with me engaging in some extracurricular team building activities – leading to the biggest intraday reversal that we’ve seen in the S&P for almost a decade, from trading 1.5% higher, to ending the day about 1.5% lower.
Before getting to that, a word on the September jobs report, data pointed to employment having risen by +119k last month. Sounds great, however the shine was rather taken off the print by almost all of those jobs coming from the Healthcare and Leisure & Hospitality sectors, not the most durable of jobs growth, plus with the prior two months of data revised lower by a net -33k. Again, seemingly a case of ‘headline for show, revisions for dough’.
Meanwhile, earnings pressures remained contained, at 0.2% MoM/3.8% YoY, though unemployment surprisingly rose to 4.4%, a new cycle high. This, though, actually came for the ‘right’ reasons, with labour force participation rising to 62.4%, suggesting that higher unemployment was driven by a rise in job seekers, as opposed to a surge in layoffs.
Still, while the data all points to the US labour market still stuttering along in September, it seems that the figures aren’t bad enough to force the FOMC into a December rate cut, especially after minutes from the October meeting leaned hawkish, suggesting that ‘many’ did not see another reduction in December as appropriate.
Risks now clearly tilt towards the FOMC standing pat at the end of the year which, if they were to do so, will probably amount to a ‘pause’ in the easing cycle, as opposed to simply skipping a meeting. The logic here being that, with easing currently being framed as ‘risk management’, holding steady in December would imply a consensus view among policymakers that the risks in question have been adequately managed. It would, hence, be unusual to then follow that up with a rate cut at the very next meeting, likely meaning that the next ‘live’ meeting would not come until next March, and that the FOMC would become much more reactive in nature, as opposed to proactively removing policy restriction in order to support the labour market. That, in turn, runs the risk that policymakers fall considerably behind the curve, only cutting again when it’s far too late.
I find it difficult to argue that the hawkish implications from the jobs report were behind the softening in sentiment that we saw yesterday, and the wobbly nature of trade recently in fact, not least considering that market pricing for the terminal fed funds rate has barely budged, and remains pinned around the 3% mark. In fact, bets on a sub-3% terminal rate are basically akin to bets on the US sliding into recession, which is very far indeed from the base case right now.
Frankly, it remains the case that there is still no obvious ‘smoking gun’ to cause risk appetite to have waned so significantly, though perhaps hedging activity is playing a significant role in all this, with the VIX pushing north of 25 yesterday (likely driven by demand for downside protection), and with participants seeking to protect gains into year-end.
That said, the fundamental bull case remains an attractive one to me – earnings growth is robust, the underlying economy is resilient, monetary policy is becoming looser, and a calmer tone continues to be adopted on trade. As such, I’d remain an equity dip buyer, especially with spoos now sat just above that 6550 zone I mentioned earlier in the week, which coincides not only with the Sept & Oct lows, but also with where the 100-day moving average currently lurks.
Yet again, it was a case of equities having all the fun yesterday, and markets elsewhere not doing much at all. The dollar softened 30 pips or so over the NFP print, but pared that move almost immediately, as is so often the way on jobs day these days, thought Treasuries held post-payrolls gains, likely driven by a degree of haven demand.
LOOK AHEAD – It’s finally Friday, and thank goodness for that!
We do, however, have a fairly busy economic docket to get through, while there is also the pivotal matter of gauging investors’ appetite to hold risk over the weekend, given the slump that we saw in equity benchmarks yesterday.
As for the data, PMIs will probably be the focus, with ‘Flash’ November figures due from pretty much everywhere, though consensus sees the surveys being close enough to the October figures such that we probably won’t learn especially much new. We also receive last month’s UK retail sales and public borrowing stats, the latter of which will almost certainly be rather grim, ahead of the Budget next week, which funnily enough will also be rather grim! Canada gives us retail sales too, while five Fed speakers will hit news wires as well.
Once all that lot has been dealt with, it’ll be beer time, and after this week I think we’ve all earned a beverage or three!