UK construction PMI comfortably beats expectations: 59.9 vs. exp.57.5

The Day So Far

Yesterday’s stock market gyrations several tested our newfound-bullishness in equities, as the S&P gave back practically all Wednesday’s ‘window dressing’ rally at the European close. The catalyst: weak US ISM Manufacturing, coming in a touch above the 50 level which signifies economic expansion and briefly re-igniting fears regarding the global economy. This was the one caveat to a our bullish call in equities; that a deterioration in the US economy would provide evidence that the global slowdown had begun to adversely affect the world’s largest economy. However, markets swiftly retraced through to the US close and our faith in the bull case remains intact....for now.

The Afternoon View

This leads us nicely to today’s NFP report, and for once the impact on Fed policy is not expected to be the deciding factor driving assets post-release. The no-hike in September at the last FOMC meeting, and more importantly the reasons given by Yellen during her press conference; blaming external factors such as China slowdown, as well as noting the lower medium term inflation outlook and her relatively downbeat assessment of the state of the labour market, left already jittery investors fretting about the US economy.

We arrive at this release with markets worried about global growth. Therefore, ‘good news is good news’ in that a positive set of numbers here will be interpreted as a good sign for the global economy, that the US is still in good shape despite slowing growth elsewhere. Rate hike worries might come in closer to the next FOMC meeting perhaps, but for now good news is back to being good news. The other observation to make is that the headline number, as well as previous revisions, assume greater importance than in recent months, as this post-crisis recovery has been marked by the lack of broad-based wage inflation and in any case we aren’t concerned at the moment for the implications on Fed policy therefore the quality of jobs is less important than the sheer number. Any number above 200k we think would be enough to placate investors and equities should continue to rally, between 180-200 and the bullish case for the day is less clear but I wouldn’t expect a move below 1900 on the S&P, whereas a headline number below 180k could lead to global growth fears flaring once again and equities will end another turbulent week comfortably below 1900. Seeing as we are looking for a good number above 200k, we are long equities and short the rest.

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