It’s a typical packed first week of the month calendar. While there are a number of potential market movers, one from last week is likely to continue to dominate the action, and the extent to which a given event or report is influential will depend on how it feeds speculation on fed QE tapering, which remains the big likely market mover.
Reaction China Manufacturing PMIs
Last week’s HSBC China PMI report disappointed markets and confirmed the view of a China slowdown. A week later, on Saturday, the official PMI report came out that not only beat expectations but also showed that contrary to what the HSBC report showed, factory activity was increasing. On Monday the final HSBC manufacturing, and the official services, PMI reports come out. If these together beat expectations, that should be bullish for markets
It’s well known that the official report covers 820 firms and includes many larger firms, while the HSBC survey covers about 400 medium and smaller sized firms, so the difference in sample size and character accounts for at least some of the difference. That said, the better official reading adds some positive counterbalance to the anxiety from the HSBC report, and may give an early lift to markets at the start of the week.
Still Viewing Everything Through QE Tapering Perspective
As we saw last week, we expect QE tapering speculation to dominate market reaction to US data. The more influential that data is believed to be on the probability of Fed QE cutbacks, the more influential the data. The most important reports will likely be the US monthly jobs reports on Friday. As always, the reports that hint at the Friday results will have market moving potential. These include:
- Monday ISM manufacturing report, particularly its jobs component
- Wednesday: ISM services report, especially the jobs component, and the ADP non farms payrolls survey
US Jobs Reports: Will Good News Be Bad News?
The US monthly jobs reports are typically among the most influential of the month because employment is one of the key metrics the Fed uses for determining policy.
Now that the Fed is considering cutting back the very QE that markets believe is the sole prop holding up asset prices while global economic growth and earnings remain weak, the jobs reports take on added importance. That much is clear.
What’s not clear is what kind of results will boost or depress risk assets.
The usual situation is that because good jobs reports suggests a stronger US economy, risk assets rise if the reports are good, and vice versa.
However, these are not normal times. As we noted in our recent article here on lessons for the coming week that we learned from last week, markets have been rising on bad economic news because that suggested QE would remain in place, and fallen on the opposite news.
Influence On Risk Assets In General
If that mentality that QE is all that’s supporting markets holds up (likely), then a very good set of jobs data could increase expectations that a cut in stimulus is coming. If so, stocks and most other risk assets would fall.
In theory a really great report could convince markets that the US recovery is becoming self-sustaining, but you need a series of good reports to create that kind of positive sentiment, and we haven’t had them yet. No one report, no matter how good, is likely to convince investors that QE can be cut back without harm to stock and other risk asset prices.
Therefore a report showing moderate improvement or decline is likely to have a more bullish effect, while a particularly strong report would likely have a bearish affect.
Influence on the USD
For the dollar, the relationship with the jobs reports remains clearer. Markets believe that less QE means less USD dilution, and raises expectations for rising interest rates. Both are bullish for the USD. So anything that’s seen as moderately positive or better is USD supportive.
Bernanke speaks Sunday, Yellen and Williams Monday, George and Fisher on Tuesday, Plosser on Thursday. Most of these are on their views of the US economy. Thus far the Fed’s message has been vague, but if investors pick up a common theme about the likelihood of a material change to QE (we think unlikely), these could be market moving.
Euro-zone Events: PMIs, GDP Wednesday, ECB Thursday
Expectations for EU economic data are low, but that makes any kind of positive news potentially influential. Nothing suggests that’s likely, but these are still worth noting.
The ECB and BoE each have policy meetings. Neither is expected to announce policy changes, but comments during the press conferences that follow could be both revealing and influential for the EUR and GBP
That said, we don’t see any change in the basic driver of the USD uptrend: the perception that the Fed is moving towards tightening relative to the other major central banks.
The Fed’s potential policy shift over the past weeks has been a classic illustration of how fundamentals ultimately drive technical moves. We may have a deeply entrenched uptrend for risk assets, but QE has been its perceived driver. Threaten that driver, and the rally stops.
We see the current pause in the risk asset rally as temporary as long as the US recovery continues to be slow and tentative, because Bernanke is more concerned about tightening too early than too late, especially while inflation remains dormant.
Therefore we suspect the current pause will ultimately morph into a buy the dip situation within the coming week or two, barring any surprises.