It was October 2nd, the date of the last payroll number that the stock market rebound really got going as after a 30 pt drop in the S&P’s in immediate response to the weak number, it then celebrated with an almost 30 pt rally by the close on the thought the Fed would not be raising rates for a while. We of course now have further embraced the rally on the growing belief that the Fed will finally raise rates. One thing should be clear though is that the Fed imposed bar for a rate hike that continuously got raised over the past few years has now all of a sudden dropped. Thus, the context of a possible rate hike is not what it used (The Fed has never hiked when the ISM was at 50 or below) to be but certainly the monetary world we currently live in is not what it used to be. Headline expectations are for a payroll gain of 185k with the private sector contributing 169k of that. I do expect the private sector figure of 118k in September to get revised up as ADP believes it should be closer to 200k after two walk looks. The unemployment rate is expected to tick down by one tenth to 5% and continues the multi year trend of falling about one tenth per month which means we’ll likely have a 4 handle by year end.
To the point of lowering the Fed bar, Reuters interviewed James Bullard last night and reported that Bullard said “US central bankers may need to mount a new communications campaign to convince markets and the public of a counter intuitive idea: that slowing monthly job growth is natural at this point in the recovery, and will allow the Fed to stay on track for a likely December rate hike.” We are certainly not in Kansas any longer. I say, the US economy was generating an average of 260k jobs in 2014 when they should have hiked vs just below 200k in 2015 and now they want to hike.
With the market cheering both no hike and the likelihood of one over the past month, even if I knew what the payroll number would be right now I would have no leanings as to how the market would respond. I guess the best outcome would be a strong number not only for the economy but if the Fed is raising rates regardless (assuming no really weak figure), the market should believe the economy can overcome a rate hike (I know, it’s a measly 25 bps). On the other hand, what the market may not like is another print of mediocrity at the same time being good enough for the Fed to raise. I want to repeat that there is no question I want a hike to get off the dangerous drug of zero but don’t for a second assume that the process ahead will be smooth. A rate hike is not the beginning of the tightening as that ended in October 2014 when QE ended.
After yesterday’s weak factory order number out of Germany, their September industrial production figure was soft as well as it dropped by 1.1% m/o/m instead of rising by .5% as expected but offsetting this somewhat was a 6 tenths upward revision to the previous month. The y/o/y gain of .2% is the slowest since March. Weakness was broad based as on a m/o/m basis they fell for capital and consumer goods, manufacturing/mining and construction. The German ministry said this “German industry is feeling light headwinds from the global economy, especially because of the slowdowns in some larger emerging markets. Companies have reined in production somewhat in light of the modest development of manufacturing orders in the 3rd quarter. Business confidence in the industry remains good and speaks in favor of a temporary weak phase.” Germany’s Q3 GDP figure will be released next week. The euro is little changed and the DAX is down about .25% but I’m sure everyone over there is waiting on the US payroll report.
In contrast to the German weakness, Spain reported its industrial output rose by 3.8% y/o/y in September, above the estimate of 2.8% and continues a run of good data. The IBEX though has been a laggard this year as its down by 2/3 of a % today, essentially flat on the year and down 9% in dollar terms.
Take it with a grain of salt because he’s a known hawk at the ECB but Governing Council member Ardo Hansson in an interview today said “knowing what I know now, I don’t think the ECB should act” further on more QE. On the possibility of a further cut to the deposit rate he said “if we were to go down the path of a deposit rate cut, it would seriously undermine the concept of forward guidance. Once you engage in a specific forward guidance and don’t follow through, then you erode credibility.” The euro didn’t respond.
UK industrial production in September fell .2% m/o/m, one tenth more than expected and August was revised down by a tenth. The manufacturing component was a hair better than expected including the August revision. Mining, and oil/gas were particularly and not surprisingly weak. The BoE yesterday in their statement were dovish but then Mark Carney in an interview with Bloomberg said he would like to raise rates in 2016. As mainland Europe is a huge market for UK exporters, Mario Draghi has mucked up any plans of the BoE to hike rates anytime soon over fears of what a stronger pound vs the euro would do. As we all know and what I said the other day, central banking now is all about FX.
After the Shanghai index closed, Chinese authorities took a step to normalizing markets after the craziness of the summer. They will start allowing IPO’s again after imposing a freeze in June. The Shanghai index was up 1.9% by the close and is up 6% on the week to the highest close since August 20th.
Peter Boockvar, Chief Market Analyst
E: peter -at-thelindseygroup.com