The Most Important Data Of The Year, That Wasn't

  • Market Overview

Every Non-Farm Payroll's number seems to get branded as the most important single piece of data for the year. Last Friday's was no exception, after two ugly US ISM prints in manufacturing and services last week. The number itself, at 136,000, was a slight miss to the downside, but the August's data was revised slightly higher to 168,000. It gave a nil-all draw look to the entire release, but the equity markets did their duty, and using a no new is good news strategy, piled back into Wall Street stocks.

The whole process left Wall Street, finishing only slightly down for the week and highlighted a valuable lesson for investors, do not get caught up in the daily noise of the street. Managing beta based on intra-week data points, can quickly make that beta look like feta. I also note that bond markets were much more circumspect, with yields rising across the curve only slightly.

The market is locked and loaded for a rate cut from the FOMC at the end of the month. Again, this is premature, in my opinion. With US unemployment at a 50-year slow, even if it is indeed finally feeling the chill winds of the global slowdown, it is slowing from a much higher and stronger starting point than most of the developed world.

What will impact the FOMC's rate cut trigger finger is what potentially will be the most important event on the year's macro calendar, and it is not the US CPI due this week. The event in question is, of course, the resumption of US-China trade talks in Washington DC, with heavyweight delegations attending from both sides. New US tariffs kick in in five days on the 12th of October, so the clock is ticking.

With President Trump writing impeachment cheques his credibility can't cash, China may prove to be less accommodating than hoped. The perceived distraction of the President increasing the odds for an easy win by engaging with a trade deal "lite" without having to negotiate any of America's red lines. Bloomberg News reported as much this morning in their lead story. If this is, in fact, China's negotiating tactic, it is a dangerous one. One thing President Trump cannot be accused of is predictability.

Broadly speaking, the trade talks will drown out the data prints this week on all but a very short-term basis. We should not expect a breakthrough, although that would be lovely if it happened. Soothing noises from either side that the talks have progressed well should be enough to jumpstart markets around the world, even if only temporarily. An official no progress or breakdown will have a magnified adverse effect. In this circumstance, the odds of a Fed cut at the end of the month will become a 100% done-deal.

Regional markets will suffer the effects of holidays in China, Hong Kong and a multitude of state holidays in Australia with reduced volumes and volatility. Both China and Hong Kong will return tomorrow, and that may be a blessing in disguise for Hong Kong. The government's face mask ban has backfired spectacularly in a violent weekend of protests that spilt over into the territories transport infrastructure. Worries of direct intervention by Beijing are increasing, and the ongoing demonstrations are now having a noticeable effect on Hong Kong's economic data as well as on the street. The Hang Seng will be unloved by investors this week.

German Factory Orders for August are released at 1400 SGT and are expected to shrink by 0.30%, an improvement over the 2.70% decline in July. With the street on recession alert, a worse print from an admittedly backwards-looking number should see renewed vigour in two of the markets favourite trades of late. Selling Euros and buying German Bunds.

Equities

With key APAC markets on holiday today and no data of note due from the region, it is no surprise that activity has been muted, even after the Wall Street rally on Friday. Mostly we have seen gentle rallies on regional bourses with Asia preferring to focus on the trade talks.

Japan's Nikkei 225 has given its early gains, down 0.25% as news that a Japanese patrol boat has collided with a North Korean trawler. Tensions were already elevated following the almost immediate breakdown in talks between North Korea and the US over the weekend. The Nikkei 225 will likely struggle for the rest of the session.

Despite most of Australia being on holiday today the ASX 200 has still managed a 0.50% rally this morning on thin volumes. Further gains will depend on the trade talks this week with Australia having a very high beta to China.

Currencies

Currency markets appeared to give the Non-Farm Payroll number their seal of approval, refusing to budge with the dollar index almost unchanged, falling 0.07% to 98.80. With Hong Kong, China and Australia all effectively out, volumes and volatility will probably remain flat-lined in Asia.

The JPY has strengthened marginally to 106.80 against the dollar on news of the North Korean trawler collision with the USDC/KRW has risen to 7.1338 for the same reason. The effects on both will be transitory, in any case.

EUR/USD is at 1.0985 and will struggle ahead of 1.1000 ahead of the German Factory Orders this afternoon which is unlikely to lift the gloom over the Eurozone.

Oil

Oil followed the leader behind equities and recorded a small if unconvincing rally on Friday after the Non-Farm Payrolls. On a spot basis, Brent crude rose 1.42% to $59.62 a barrel and WTI rose 1.34% to $53.00 a barrel.

With holiday reduced activity in the region, both contracts have fallen this morning as Asia frets over the outcome of this weeks trade talks. Both Brent and WTI are lower by 0.40% in morning trade. It will take some good news coming out of Washington DC this week to move the dial on oil as growth and supply concerns cap any rallies.

Gold

Gold finished the week unchanged at $1505.00 an ounce having traded in a choppy 20 dollar range intra-day. Gold appears to have been content to trade inversely to North American equity markets over the past week.

With a lack of specific gold inputs to drive the price, the S&P purgatory looks set to continue for some time yet. Investors attention will likely be elsewhere as the week gets underway.

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