Market Thoughts – Thursday 5th September – Conviction Lacking Ahead Of NFP

Where We Stand – So, yesterday. A relief rally? Not quite. Better than the day before? Most definitely!

I suppose the bulls, like me, will at least be pleased that yesterday didn’t see another brutal equity sell-off, though both the S&P and Nasdaq ending the day marginally in the red isn’t exactly enough to completely allay worries sparked by Tuesday’s chunky lurch lower. In many ways, the short-term lack of conviction to buy the dip was unsurprising, with anticipation – and nerves – ahead of Friday’s nonfarm payrolls print likely dampening conviction to a significant degree.

On that note, it should perhaps not come as a surprise that equities started the month on such shaky footing. This year, the S&P 500 has ended the first trading day of the month on 5 of 9 occasions, notching an average loss of 0.73% on those red days. That, for context, compares with the average daily performance of the index this year, which is an 0.19% daily advance.

Stats are interesting, but past performance is of course not a reliable indicator of future returns. Friday’s jobs report continues to hold the key for sentiment, and riskier assets, in the short-term, while the longer-run direction of travel remains to the upside, amid strong economic and earnings growth, coupled with the forceful ‘Fed put’ remaining in place.

Elsewhere, yesterday, we had yet another example of the UK government shooting itself in the foot from a macroeconomic point of view, with the FT reporting that the so-called ‘British ISA’ scheme, to encourage greater retail investment in the domestic equity market, would be scrapped. Quite what those in Number 10, and the Treasury, are drinking at this stage, I’m not sure – though I wouldn’t mind trying some of it!

These reports do feel like a mere taste of things to come, with the Budget still almost 2 months away, and the prospect of further ISA changes, in addition to the already-announced winter fuel allowance means testing, and potential tweaks to capital gains, and corporation, taxes remains on the table. Whether or not one believes that the £22bln fiscal ‘black hole’ is real, or a political concoction designed to blame the Conservatives for any potential negative economic developments, the downside growth risks that the continued tightening in fiscal policy will create, and downside risks to the GBP that subsequently emerge, are undeniable.

In actual fact, the ‘worst economic inheritance that any government has ever received’ – I perhaps over-egg the pudding a little – is far from the truth. Yesterday’s final August PMI figures pointed to a fairly chunky upward revision to the services gauge, which stood at 53.7 in August, its highest level since April. Still, I suppose we shouldn’t get too excited, as a steam-roller will soon be taken to this solid momentum.

As for other developments yesterday, the Bank of Canada delivered a third straight 25bp rate cut, as the sell-side had fully expected, and markets had adequately discounted in advance. The loonie was, hence, unchanged over the decision, even as Governor Macklem indicated that further cuts remain likely, so long as inflation continues to ease. The CAD OIS curve already fully discounts 25bp cuts at the remaining two meetings this year, which seem likely to be delivered, potentially leaving the CAD vulnerable to downside if curves elsewhere – such as in the US – reprice in a hawkish direction, with the 100bp of Fed cuts priced by year-end still looking too punchy.

On which note, Fed doves would’ve been further emboldened by yesterday’s JOLTS figure, with job openings in July falling to 7.673mln, well below the bottom end of the forecast range, and the lowest level since the start of 2021. Such a figure, naturally, raises the stakes for Friday's jobs report, and provides additional signs that 'bad news is bad news' at present, with participants more focused on downside growth risks, than the potential for additional policy stimulus, given the equity downside/Treasury upside seen as the data crossed news wires. The 2s10s spread also flipped back into positive territory, for just the second time this year, as the front-end outperformed in the aftermath of the figures, with 2s down about 10bp on the day, with benchmark yields slipping to the lowest since early-August.

Crude, though, was perhaps the most interesting market on the day, experiencing incredibly choppy conditions as a deluge of OPEC+ ‘sources’ stories arrived. The long and the short of said reports is that it is becoming increasingly likely that October’s planned output hike looks set to be delayed, by virtue of both recent market volatility, and the continued weak demand outlook. Isn’t it amazing how much a 5% fall in price can change OPEC’s mind?! In any case, front WTI failed to reclaim $70bbl, and remains unlikely to achieve any kind of sustainable rally, unless a significant pick-up in global demand comes to pass.

Look Ahead – We continue to inch towards this week’s main event – Friday’s US labour market report – with a relatively quiet calendar ahead of us.

Today’s highlight stands as the August US ISM services PMI, which is seen broadly unchanged at 51.3, compared to the 51.4 print in July. After Tuesday’s downside surprise – and subsequent violent market reaction – to the equivalent manufacturing gauge, the figures will be closely watched for any further signs of economic woe, particularly with participants continuing to display a heightened sensitivity to negative data surprises, as shown by yesterday’s JOLTS figure. The employment sub-index, meanwhile, will also be parsed for any potential read-across to tomorrow’s jobs report.

Away from the ISM report, a handful of reads on the US labour market are due. Both, however, can be safely ignored – the ADP employment figure is little more than a ‘random number generator’  at this point, while neither the initial or continuing jobless claims prints coincide with the survey week for the August jobs report. Unit labour costs, in contrast, might attract some attention, though as a final revision of Q2 data, shouldn’t move the needle too much.