On Tuesday the market was JOLTed And buyers of assets revolted But then ADP Said, no, look at me And bulls, toward risk assets, all bolted Now those numbers offer a foretaste Of how market prices are two-faced But really the key Is Sep’s NFP Ahead of which, traders will stay chaste
Remember all the carnage on Tuesday? Never mind! In truth, it is remarkable that the market response to the Tuesday JOLTS data was so strong, given the number has historically not been a key market driver. At the same time, yesterday’s weaker than expected ADP Employment data, just 89K new jobs, had the exact opposite impact on the market. So, bonds rallied, and yields declined sharply, with 10-yr Treasury yields lower by 14bps from the highs seen yesterday pre-data, while stocks rallied nicely, led by the NASDAQ’s 1.4% gains although the other two indices lagged that badly.
My first thought was to determine what type of relationship both numbers have with the NFP data which is set for release tomorrow morning. I ran some simple regressions for the past year and as it happens, the R2 between NFP and ADP is 0.5 while between NFP and JOLTS it is 0.65. I do find it interesting that the JOLTS data, which has a bigger lag built in, has the stronger relationship, but I also remember that ADP changed its model and formulation and since they have done that, the fit to NFP is far less impressive.
It is anyone’s guess as to what tomorrow’s data is actually going to be like, but it is clearly instructive that the market was so keen to react to both of these data points so dramatically ahead of the release. Ostensibly, the market has come around to my view that NFP is the data point on which the Fed is relying to continue their higher for longer mantra. As such, a weak number (something like 100K or lower) seems very likely to soften the tone of Fedspeak and result in an immediate rip-roaring rally in the stock market. Correspondingly, a strong number (200K or higher) seems more likely to bring out the hawkishness that remains widely evident on the FOMC. The consensus view appears to be 160K, but then consensus for ADP was 150K and that missed badly.
The point is, for now, the market is hyper focused on the NFP number, and I suspect that between now and then, we are unlikely to see too much movement. As an aside, one of the best indicators of the employment situation is Initial Claims, which is more frequent and thus timelier, and that number, which is expected at 210K this morning, has clearly been trending lower, a sign of a strong jobs market. I believe we will need to see a lot of convincing evidence for the Fed to alter their current stance, but tomorrow’s NFP will certainly be important.
Away from that, right now other fundamentals just don’t seem to matter very much. The dysfunction in Washington is a big issue in Washington, but not in financial markets, at least not yet. I guess if we wind up in a situation where there is a government shutdown it may wind up mattering, but we know there is six weeks before that will come up again. Next week is the Treasury refunding auction with $102 billion of notes and bonds coming to market. I believe a key part of the bond market’s recent downward trend is the concern over the massive supply that is coming to market. Next week’s realization, plus the fact that there is no end in sight should continue to weigh on bond prices and support yields. And as long as US yields are forced higher, so too will be European sovereign, and truthfully, global yields.
On the oil front, the OPEC+ meeting came and went without incident as the production cuts that the Saudis initiated back in June are to remain in place through December, at least, with the group set to revisit the issue later in the year. While oil (-2.0%) has been slumping badly during the past week, falling $10/bbl in that short time frame, I would contend the trend remains higher. Remember, oil is a highly volatile commodity, both in reality and from a market price perspective. We have heard nothing to alter my long-term conclusion that oil demand is going to continue to grow and oil supply remains constricted. In truth, if I were a hedger, I would be looking to take advantage of the current price action, especially since the market is in backwardation (future prices are lower than current spot prices) so hedging is quite cost effective. It’s kind of like earning the points in FX.
At the same time, metals prices remain under pressure with gold suffering from the combination of still high US yields and a strong dollar, while industrial metals like copper and aluminum are both pointing to weaker economic activity. I continue to believe this is a short-term fluctuation in a broader long-term move higher in commodities in general, but again, if I were a hedger, current prices would be interesting.
A look at equity markets overnight showed that the Nikkei (+1.8%) approved of the US price action and that dragged much of the rest of Asia along for the ride although, recall, mainland China remains closed for their Golden Week holidays. In Europe, today has been far less impressive with very modest gains across the continent averaging about 0.2% while US futures are little changed at this hour (7:30). As I said before, I anticipate a slow day ahead of tomorrow’s NFP report.
Turning to the dollar, it, too, is little changed this morning after a bit of a sell-off yesterday. For instance, the euro, which has rebounded from its recent lows, is still just barely above 1.05 and higher by just 0.1% this morning. And those gains are similar across all the major currencies. Now, if we look at the EMG bloc, despite the dollar’s pullback against some G10 counterparts, we see MXN (-1.0%) and ZAR (-1.25%) leading the way lower as both of those nations have large commodity sectors and the decline in prices there is more than sufficient to offset any benefit of a little bit of dollar weakness broadly. Here, too, I see no reason to change my view on the dollar following yields higher, and the fact that yields have backed off for a day does not change the underlying reality.
In addition to the Initial Claims data, we see the Trade data (exp -$62.3B) and we hear from three more Fed speakers, Mester, Daly and Barr. ADP did not change the world. We will need to see more data demonstrating that growth, at least as defined by the Fed, is slowing before they are going to change their tune. Today is shaping up as quite dull, but tomorrow, at least immediately after the 8:30 data print, could be interesting. Remember, too, that Monday is Columbus Day, so markets will have less liquidity and be susceptible to larger movements.
Good luck
Adf