Market movers today PMI services from around the world and US ISM non-manufacturing are due out today. In particular, the US ISM non-manufacturing index will be interesting given the sharp fall in the ISM manufacturing index, which caused a repricing by the Fed. ISM non-manufacturing has been robust so far but the risk is the manufacturing recession spreads to the service sector. Also look out for the ISM non-manufacturing employment sub-index ahead of US non-farm payrolls tomorrow.
We also have a range of FOMC members speaking, where hints of whether the Fed will ease again later this month or not remain key for market sentiment.
UK Prime Minister Boris Johnson presented his Brexit proposal to the public yesterday and now it is up to the EU to decide whether the proposal can make a basis for further talks or not. Notably, the EU may have concerns as to whether the proposal is simply part of a blame game by PM Johnson. Officials generally welcomed a plan from the UK but EU Commission head Juncker said yesterday that ‘problematic points’ remain.
In the Scandies, we get housing data out of Norway and PMI services out of Sweden, see next page.
Selected market news
Equities had a rough run on Wednesday after a somewhat weak ADP report spurred fears that the otherwise resilient-looking US consumer is starting to be hit by the global industrial slowdown. ADP employment on the headline came close to expectations at 135K vs consensus 140K but the previous month was revised down to 157K from 195K and thus on balance left the impression of weakening. The correlation of ADF to the all-important non-farm payrolls report from month to month is not high, but note that we have a below-consensus call of 100K on the latter for tomorrow. Then signs of a softening labour market will be key for the Fed, as comfort has so far been taken from US private consumption holding up well amid the manufacturing slump on the back of trade woes.
Equities sold off overnight, with the S&P down 1.8% and Nikkei down close to 2% on the day at the time of writing. Strong support was seen in US Treasuries and the curve bull steepened as 2Y yields dropped by 7.0bp and 10Y by 4.5bp. Regarding Fed pricing, the market is now pricing more than 70% probability of a 25bp October rate cut compared to 60% the day before. EUR/USD edged higher and is back above 1.0950, while Brent crude is below the levels seen before the latest Middle East tensions.
Tensions between the EU and the US flared up as the WTO authorised tariffs on USD7.5bn of notably aircraft and food products from the EU due to the subsidies provided to Airbus. Separately, the US high-level trade negotiations will likely start next week, and we now assign a 60% probability of an interim trade deal, which should help to de-escalate the trade war. However, the road to a big deal is still paved with many obstacles, in our view. However, an interim deal should be positive for risk sentiment in the short term, see US-China Trade – 60% probability of an interim deal .
