Market sentiment and reaction to macro indicators is a fickle thing. Sometimes ‘bad news is good news,’ if disappointing macro data increases hopes of more favourable moves from central banks. However, market reaction to the latest US manufacturing data signified that we are currently in the ‘bad news is bad news’ phase. Another dip in US manufacturing activity saw risk assets slide to start the week, in a move a little reminiscent of what we witnessed on global markets at the start of last month. However, so far, the move hasn’t reached the same stage of panic selling that we saw in August.
So, while markets are again off to a rocky start courtesy of dour economic data, there could be more fireworks to come this week. US jobs data has a history of ‘rocking the boat’ when it comes to financial markets stability. The lowly NFP (Non-farm Payrolls) print last month (in conjunction with the Japanese interest rate hike) sent markets into a spin, and with investors still on tenterhooks regarding the ‘R’ word (recession), there is quite a lot riding on this next NFP print in terms of both market momentum and indeed the size of potential Fed action on the interest rate front.
US labour market data is difficult to get a read on and given all the downward revisions we have seen to the numbers from the past year, one wonders how accurate the figures really are. Nonetheless, markets will react to the headline figure. 165k jobs created in August is the consensus expectation. If we have a second consecutive month where the NFP figure is closer to 100k than 150k this would likely act as another wet blanket on market sentiment. Even though it may well spark calls for a more aggressive rate cut size from the Fed. The reaction of the USD and bond yields to the jobs data will tell the story of how the result impacts expectations for the FOMC meeting this month.
In FX, the USD continues its climb off the August lows, with the short greenback moves looking a little exhausted. The Dollar Index (DXY) has bounced modestly to the tune just over 1% from its lows (from the end of last month), and short-term direction will be dictated by how the US NFP print influences FOMC interest rate expectations. While the Dollar is generally doing better so far this month, it is still finding the going tough against the yen, with the Japanese currency posting gains on hawkish rhetoric from the BOJ (Bank of Japan) who have reminded markets that there could be more policy tightening to come.
Gold momentum has shown signs of stalling with the rebound of the USD acting as an obstacle in the way of further upside for the precious metal. The spot price has again slipped below the $2500 level (as of Asian trading hours on Wednesday). Though, the pullback has been limited with investors still fancying gold against the current backdrop of geopolitical risks and anticipation of US interest rates heading south. Levels to watch include support at $2476 and further back at $2458, while immediate resistance awaits at $2508 and $2525.
How the cards fall in relation to US employment data this week will be a determining factor for whether a gold pullback occurs or the uptrend resumes. If the jobs data suggests that the Fed will need to be active with a series of rate cuts before year-end this would probably suit gold, but so too could any bouts of risk aversion which may stem from a low number. Essentially, there are multiple scenarios which could result in gold heading higher, but the risk in the form of a larger rebound in the USD lingers.
Elsewhere, lowly manufacturing data results from China and the US over the past week have hurt the energy demand outlook and the price of crude has suffered as a result. Oil is hovering around the $70 (US contract) with the prospect of increased OPEC supply from next month also pushing prices lower. However, if the oil price remains in a slump, one wonders whether OPEC members will still be keen on carrying through with output increases, as this could put the price of crude in uncomfortable territory for certain members of the cartel from a profitability standpoint.
