ost of the time since the 2009 bear market bottom, equity traders have been playing the “bad news is good news” game, treading poor economic news as a sign that central banks would need to put more liquidity/cheap money into the financial system and running up stocks. This now appears to be changing with traders treating positive PMI reports as good news and weak PMI reports as bad news for both stocks and commodities.
There were a lot of winners and losers in this month’s more volatile than usual round of manufacturing PMI reports, but two reports had a particularly strong impact on trading today.
The US ISM report was a big disappointment with both the headline PMI and the new orders component surprisingly falling under 50 into contraction territory. Even though the Markit PMI report held steady near 52 and did not confirm the RSI, traders took this as an indication that the Fed could hold off on a September rate hike and sent the US Dollar lower. US stocks, didn’t get their usual bad news liquidity boost this time. Instead, stocks dropped off significantly in the wake of the news although they made a lot of it back in the afternoon.
The reason for the drop is that with NY Fed President Dudley having reminded markets a couple of weeks ago that a Fed rate hike at this point in the cycle is a vote of confidence in the economy, a declining PMI suggests a weaker economy and a weaker environment for corporate earnings.
Crude oil traders appear to have picked up on the negative signal the PMI report sent about the prospects for energy demand, sending WTI and Brent down another 2.5%-3.0%.
The other manufacturing PMI report which generated a lot of action was in the UK which came in way above expectations and up from last month. This indicates what little impact the Brexit vote may have had on the UK economy has already faded and that the howls of doom before the vote were totally overblown. This news sparked a big rally in GBP Thursday including a big breakout against EUR and continued gains against USD. Friday brings UK construction PMI with traders looking for more signs of a strong summer for the UK economy.
All of this news sets the stage for Friday’s big nonfarm payrolls report, one of the last big numbers that could potentially influence the decision at this month’s Fed meeting. With the US approaching full employment, FOMC members have been downplaying the level of job creation needed to make a hawkish move. As such, a 200K+ report would likely clinch a September rate increase, a 100K-200K increase in payrolls would mean a coin toss at the meeting, while below 100K could give the Fed a reason to hold off for now and signal toward a December increase.
The street is expecting nonfarm payrolls to increase 180K down from 255K last month but similar to yesterday’s 177K growth in ADP payrolls. I’m thinking 210K including a 10K downward revision to last month.
Friday also brings US and Canada trade balances and an employment report Spain which may attract attention after a better than expected Spanish manufacturing PMI report propelled a breakout for the IBEX today. Canadian employment numbers don’t come out until next Friday.
There have been no major corporate announcements after the US close today.
Significant announcements released overnight include:
US construction spending 0.0% vs street 0.5%
US construction spending previous revised up to 0.9% from (0.6%)
US jobless claims 263K vs street 265K
US natural gas 51 BCF vs street 43 BCF
Manufacturing PMI reports:
US ISM 49.4 vs street 52.0 vs previous 52.6
US ISM new orders 53.0 vs previous 56.9
US Markit 52.0 vs street 52.1
Canada 51.1 vs previous 51.9
UK 53.3 vs street 49.0 vs previous 48.2
Germany 53.6 as expected
France 48.3 vs street 48.5
Spain 51.0 vs street 50.9
Italy 49.8 vs street 51.2
Sweden 50.7 street 54.0
Norway 50.8 vs street 54.7
Poland 51.5 vs street 50.6
Greece 50.4 vs previous 48.7
Upcoming significant economic announcements include:
(Note: 11:30 am in Sydney/Melbourne is currently 1:30 pm in Auckland, 4:30 pm in Vancouver, 7:30 pm in Toronto/Montréal, 12:30 am in London and 8:30 am in Singapore)
9:30 am BST UK construction PMI street 46.3 vs previous 45.9
8:00 am BST Spain unemployment street 3K vs previous (84K)
9:00 am BST Norway unemployment rate street 3.1%
9:00 am BST Italy GDP street 0.7%
10:00 am BST Eurozone producer prices street (2.9%)
8:30 am EDT US nonfarm payrolls street 180K
8:30 am EDT US NFP revision previous 255K
8:30 am EDT US private payrolls street 180K
8:30 am EDT US unemployment rate street 4.8%
8:30 am EDT US average hourly earnings street 2.5%
8:30 am EDT US trade balance street ($41.5B)
8:30 am EDT Canada trade balance street ($3.3B)
9:45 am EDT US ISM New York previous 60.7
10:00 am EDT US factory orders street 2.0%
1:00 pm EDT FOMC Lacker speaking
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