Friday, October 4, 2019

Dollar falls and stocks rise as Fed rate cut probabilities spike; will NonFarm Payrolls disappoint the market?

  • Dollar
  • Gold
  • Euro
  • Pound
  • Stocks

Market recap: ISM Non-Manufacturing PMI confirms US economic slowdown

Institute for Supply Management (ISM) Non-Manufacturing Purchasing Managers’ Index (PMI) fell short of estimates of 55.0, to 52.6 for September. The dollar weakened against major currencies as markets viewed the data as confirmation of an economic slowdown in the US. The Dollar Index fell 0.16%, dropping to as low as 98.64 in the day.

The disappointing news sent market expectations for a Fed rate cut in October surging. Fed Fund Futures indicates probabilities for a 25bps rate cut reached 88.2% on Thursday, rising from 77% on Wednesday. US equities fell more than 1% on the release of the ISM Non-Manufacturing PMI data, but recovered as expectations for a rate cut rose. The DJIA rose 0.47% and the S&P500 advanced 0.80%. The Nasdaq surged 1.12%.

Meanwhile, US Treasury yields continued its descent, with two-year yields falling 9bps to 1.39% and 10-year yields dropping to 1.53%.

Safe haven assets advanced for the third day in a row, with gold gaining 0.38%, breaking the 1500’s level. Yen strengthened across currencies, rising 0.24% against the dollar and 0.20% against euros.

In the UK and Europe, British Prime Minister Boris Johnson was given a week by the EU to revise his Brexit proposal as it failed to meet EU’s expectations of a solution to the Irish backstop. The FTSE 100 closed 0.63% lower on the day, while the Euro Stoxx 50 Index closed 0.12% higher. Sterling gained against the dollar closing at 1.2332 while the EUR/USD was little changed, likely a result of the announcement of US tariffs on EU goods.

Asian markets opened mixed in the morning, with the Hang Seng and the Straits Times Index rising 0.23% and 0.04% respectively while the Nikkei opened lower, as a stronger yen is expected to weigh on demand for Japanese goods.

Today’s Analysis: Focus on US employment data releasing later today

The US Department of Labor will be releasing September’s NonFarm Payrolls report and Unemployment Rate later today.

US Employment data releasing later today

The disappointing Automatic Data Processing’s (ADP) Employment Change on Tuesday is a signal that today’s employment data may disappoint as well. However, ADP Employment Change only surveys the private sector while today’s data will include the public sector.

Markit PMI data (which surveys only the private sector) released earlier this week indicated a marginal rise in employment in the US manufacturing sector. However, the US services sector declined for the first time since February 2010. ISM PMI data (which surveys both private and public sectors) indicated that employment contracted by 2.7% and 1.1% in the services and manufacturing sectors respectively.

As prior data signals a slowdown in the US labour market, we forecast that Change in NonFarm Payrolls and Unemployment Rate data is likely to disappoint markets. The dollar is therefore likely to continue its descent against major currencies. The Dollar Index may break 98.64’s levels should employment data disappoint today, to range between 98.44 and 98.63. Gold prices may also rise nearer to its week’s high, to 1520-1524’s level, provided the dollar weakens.

Scenario analysis on Dollar Index