Mixed US data sends conflicting signals

The buy everything trade powered ahead with a vengeance overnight, equities, oil and precious metals rising, with the US sell-off gathering pace also. Data releases overnight sent conflicting signals which makes the moves even more confusing. US ADP Employment severely underperformed, whiles US Services PMI rose, even as US Non-Manufacturing PMI eased.

European Services PMIs also disappointed, but the fall in the euro was short-lived as the “FOMO-nista’s” happily bought the dip. US short end yields actually rose overnight, which should have been dollar supportive, as the US Treasury announced a higher borrowing issuance. There is a considerable amount of irony there, as it should have been a surprise to precisely nobody. The US was running trillion-dollar deficits before the pandemic, and they will be running much larger ones now.

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On top of this, the follow-on US fiscal stimulus talks remain deadlocked mostly because the Democrats want an actual stimulus package. In contrast, the Republicans want what would effectively be a pay cut package. I am ambivalent regarding either position, content in the knowledge that with an election on the horizon, a deal of some sort will be done.

With so many conflicting signals, there was a certain desperation in the air to find facts that fitted the price action. Something that is all too common these days as “data” has all the answers to everything, allegedly.

The answer, in my view, is very much more straightforward. Financial markets went back to their happy place, with the “FOMO-nistas” catching the first express train out of momentum station. The headless chicken follows the herd price action on show overnight is causing me some concerns today though. Although I believe that US monetary policy is driving a secular rotation out of US dollars and into equities, G-10 and emerging markets currencies, and most notably, precious metals, things may have got a little out of hand overnight.

Tomorrow’s Non-Farm Payroll’s data now looms as an acute short-term adverse risk, given the momentum displayed by the buy everything trade in the last 24 hours. The ADP Employment hints that tomorrow’s number could be well short of the 1.6 million job increase the markets expect. That reckoning could even come sooner if tonight’s US Initial and Continuing Claims disappoints. The risks are rising quickly, that tomorrow’s Non-Farm Payrolls could dish out some aggressive hard love to the legions of recent passengers aboard the buy everything express. Watch out for potential signal failures and train derailments.

Asia’s data release schedule is modest today, with the highlight being the Bank of India rate decision at 1415 SGT. The RBI is likely to bow to the pressure finally, and shave 25 basis points of the reference rate to 3.75%. A weaker US dollar, in general, has not flowed through to a much stronger rupee, as economic activity suffers from one of the world’s highest Covid-19 totals.

India’s economic outlook was not particularly upbeat before the pandemic, and is much worse now, making it one of Asia’s worst performers. The non-bank financial sector, in particular, continues to be a concern, as does a weaker rupee. India is also suffering price rises in crucial goods, even as growth shrinks, leaving the RBI in an almost stagflationary quandary. The RBI will cut today, but India itself will likely remain an underperformer in the greater Asia region.

The Bank of England announces its rate decision this afternoon at 1400 SGT. With the British pound a stronger out-performer in recent times, the risks are that the BOE mentions something about negative interest rates. I expect rates to remain unchanged at 0.10%, with the GBP 745 billion QE target also unchanged. My views on negative rates are well known; it is an ineffective policy. However, if the BOE Committee isn’t listening to me, comments on negative rates could spark a short and sharp retreat by the pound.

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