It’s been rather a strange week for global equity markets, moving from an expectation that we could well see some movement on trade between the US and China in the next couple of weeks, to the prospect that any solution may well not happen until after the next presidential election.
As a result of these mixed signals investors appear to be taking a more cautious view as to what may happen next, and are likely to wait until after 15 December, when the next set of US tariffs on Chinese goods are set to kick in.
This caution translated into a European session that saw stocks finish broadly lower yesterday, and US markets managed to eke out a small gain after President Trump said that talks between the US and China on trade were progressing well. The problem now is there is less confidence that the President actually means what he says, when he comes out with comments like that.
Today’s European session is likely to be similarly cautious, opening slightly higher, with the main focus likely to be on the latest US payrolls report for November.
Investors continue to have differing perceptions about how well the US economy is doing as we head into year end. A disappointing manufacturing ISM report on Monday along with a weak construction spending number raised concerns that the US economy was slowing sharply.
A weak November ADP employment report on Wednesday served to muddy the waters further, as the latest data continues to give mixed signals as to the health of the US economy. The latest ISM non-manufacturing survey for November went some way to offset some of those concerns, coming in at 53.9, slightly below expectations, however the internals were quite positive with new orders increasing to 57.1, the employment component rising to 55.5, and prices paid rising to 58.5, all above the October readings.
The mixed nature of the data makes trying to predict where we are in the economic cycle that much trickier and while there were low expectations around the October jobs report, expectations for November are that much greater.
The low expectations around the October jobs report turned out to be a bit of a mixed blessing, as the better than expected 128k number, along with an upward revision in the September numbers, offset concerns about a fall in the wages data, and a rise in the unemployment rate.
Expectations that the General Motors strikes would see a sharp fall in the headline number proved to be wide of the mark, and while the number was on the low side, it was well above the consensus 90k.
Today’s November non-farm payrolls numbers should see a pickup in seasonal hiring, as well as the adding back in of the GM strike numbers, as the US economy gears up for Thanksgiving and the pre-Christmas period, with expectations of a rise to 185k. In another sign of a robust labour market, jobless claims yesterday came in at 203k, a seven-month low
Over the last few years the last three months of the year has consistently seen decent job gains. This year isn’t likely to be any different, despite this week’s weak ADP number. A decent number here is likely to keep the prospect of any further Fed rate cuts at bay until early next year, however if the headline number does match the ADP report then we could well see a shift in rate cut expectations for next week from the current 2.3% to a much higher number. Wage growth is expected to remain steady at 3%, while the unemployment rate is expected to stay at 3.6%.
It’s also Canada jobs day with 25k new jobs expected to be added in November after a big fall in full-time jobs in October of 16.1k. The unemployment rate is expected to stay steady at 5.5%.
The pound has continued to hold up well, hitting fresh 30-month highs against the euro and 8-month highs against the US dollar, as markets bet that the Conservatives will be able to maintain their lead in the polls.
The US dollar has also come under pressure this week as concern over weaker data, and a trade deal delay weighs on sentiment.
EUR/USD – continues to struggle above the 1.1110 area. There is still big resistance behind that at the 1.1180 area and 200-day MA. Still has solid support at the lows last week at 1.0980.
GBP/USD – the break of 1.3020 opens up the prospect of a move towards 1.3200, and even the 1.3500 area. Pullbacks should now find support at the 1.3020 area with a break below reopening the 1.2760 level. The 200-week MA at 1.3070 is also a big level with a weekly close targeting a wider move towards 1.3500.
EUR/GBP – has fallen below the 0.8470 area, and now opens up a potential retest of the 0.8350 area. We could still see a short squeeze back to the 0.8570 area, but the bias continues to shift to further losses in the coming weeks.
USD/JPY – currently finding support at the 50-day MA at 108.45, with a break targeting the 107.80 area. We still have solid resistance up near the 110.00 area, as well as trend line resistance from the 2018 highs at 114.75.