Wednesday, October 2, 2019

Fears of an economic slowdown cause market anxiety; will the Fed cut rates in October?

Tags
  • China
  • Dollar
  • Gold
  • Euro
  • Stocks

Market recap: Equities tumble while the yen and gold rise

Global markets endured a tough Tuesday, after the US Institute for Supply Management’s (ISM) Manufacturing Purchasing Managers’ Index (PMI) fell short of analysts’ predictions of 50.1, dropping to 47.8 in September instead. A PMI under 50 not only indicates contraction, it also raises fears the US is heading for an economic slowdown – and its data for September is also its lowest score since June 2009.

Investors will be hoping for better news from the US labour market this week. The Automatic Data Processing (ADP) releases its Employment Change figures today at 4.15pm (GMT +4), while the latest NonFarm Payrolls report is out this Friday, October 4th at 4.30pm (GMT +4).

Meanwhile, equities in the US tumbled sharply across the board on Tuesday. The DJIA plummeted 1.28%, the S&P 500 slumped 1.23% while the Nasdaq dropped 1.13%. The dollar also fell across major currencies, with the Dollar Index closing 0.25% lower.

The yen surged against the dollar as investors flocked to safe haven assets, gaining as much as 0.5% during the day. Gold advanced 0.45%, while US Treasury yields fell. Two-year yields sank to 1.55%, 10-year yields fell 1.64% and 30-year yields dropped to 2.09%.

EUR/USD rose 0.30% to 1.093’s levels, thanks in part to a weakening dollar and better-than-expected PMI data from the EU, although further gains were stunted by disappointing Consumer Price Index (CPI) data. It fell to 0.9% for September, just missing analysts’ expectations of 1%.

The Royal Bank of Australia (RBA) announced on Tuesday it will lower its cash rate by 25bps to 0.75%, and suggested an extended period of low interest rates shouldn’t come as a surprise to anyone, if it is going to meet its targets. The Aussie fell against the dollar, dropping as much as 0.59% after the announcement.

Asian equity markets tracked US losses at the start of today’s trading, with the Nikkei, HSI and STI opening 0.64%, 0.73% and 0.75% lower respectively.


Today’s analysis: Keep an eye on new labour market data from the US

Futures tracking the prospect of a Fed rate cut this month now believe market sentiment has switched. The chance of a 25bps cut has risen to 63.6%, up from the previous level of 39.6% predicted on September 30th. The next Fed monetary policy meeting takes place October 30th.

ISM Manufacturing PMI reaches two-year low

The data comes hot on the heels of strong inflation numbers, with Core Personal Consumption Expenditure (Core PCE) reaching 1.9% for the second quarter of 2019, just shy of the Fed’s 2% target. Investors will study labour market data released today (the ADP’s National Employment Report) and Friday (NonFarm Payrolls and Average Weekly Earnings reports) looking for clues that point towards a rate cut. The Fed’s decision will also likely be affected by trade war talks between the US and China that are scheduled for mid-October.

PMI data disappoints, all eyes on upcoming labour market data

Core PCE year-on-year rises over the past three quarters

The US Commerce Department’s personal consumption expenditures (PCE) price index has also risen over the past three quarters and reached 1.77% in August. As the latest figures for Core PCE (for both year-on-year and quarter-on-quarter) are within the 1.75-2% range, the Fed is likely to show caution before deciding on a rate cut.

The ADP’s employment numbers released today will give some indication of what to expect from the NonFarm Payrolls release scheduled for Friday. In the short term, we expect labour market data to disappoint, possibly causing the dollar to drop to a slightly lower range between 99.06 and 99.12’s levels.
 

Scenario

In the medium term, we forecast the Fed to hold rates on October 31st, while it continues to analyse conflicting US domestic economy data. As the dollar remains strong against other major currencies and other central banks rate cuts, it is likely the Fed will appear more dovish and save more rate cuts for the future. Assuming labour market data disappoints, the dollar may drop further to 98.92’s levels.