European markets got off to a mixed start to September, as investors digested a raft of underwhelming economic data, from China to the US, and looks set for a similarly mixed open today.
The latest PMI numbers from China this week have been particularly disappointing, as concerns grow that the slowdown there is starting to get more entrenched.
In Europe the latest manufacturing PMI numbers from Spain, Italy, France and Germany still looked fairly solid, as did the UK numbers, while in the US, another disappointing ADP employment report only served to reinforce Federal Reserve chairman Jay Powell’s cautious comments about a possible tapering of asset purchases at Jackson Hole last week.
His clear delineation between the Fed's inflation mandate and its employment mandate reassured markets last week, as well as weakening the US dollar. Additionally, the reinforcement of the message that tapering is not tightening, and merely a reflection of a slower improvement in the economy, has helped reassure investors that the central bank is not going to be hasty in removing accommodation.
This caution on the part of Powell last week was underscored by yesterday’s disappointing ADP payrolls report, which saw 374,000 jobs added in August, well below the 640,000 expected. The disappointment was reinforced by an ISM manufacturing report which saw the employment component contract to 49, from 52.9 in July, while inflation also softened as prices paid slipped back to 79.4.
As a leading indicator for tomorrow’s jobs report, neither of these misses on employment is a particularly encouraging sign, however it's not the end of the world either. Last month the ADP payrolls report fell short, with a similarly weak 326,000 figure, only for non-farm payrolls to comfortably beat expectations.
We also know that job vacancies are at record levels, which suggests that people are being selective in terms of returning to the workforce. With the various unemployment and stimulus benefits coming to an end this month, we should see hiring start to accelerate during September, even if tomorrow’s jobs report is disappointing.
Even if it isn’t, attention will soon shift to this month's Fed meeting, in terms of a timeline towards a reduction in the monthly asset purchase programme. A poor report won’t change the likelihood of a tapering of purchases, but it will affect the pace, timing and scope of one.
Today’s jobless claims numbers are expected to see a fall to 342,000, from 353,000.
EUR/USD – look to be heading back to the July peaks at 1.1910, and behind that the 25th June highs at 1.1975. The 1.1780/90 area should now act as support for this to unfold. Below 1.1780 retargets the 1.1720 area.
GBP/USD – the current rebound from the August lows remains lacklustre. We need to see a move through the 1.3820 area to open up 1.3900. Trend line support at 1.3750 needs to hold for the current rebound to continue or risk a move back to the 1.3680 level.
EUR/GBP – we appear to be edging back towards the 0.8640 level with support currently near the 0.8560 area. Below 0.8550 retargets 0.8520.
USD/JPY – currently going nowhere quickly, despite a brief move up to 110.40 yesterday. Currently have support at 109.70, as well as the 109.10 area. We need to see a break either side to determine the direction of the next move.