Major US indices continued their rebound yesterday as US politicians found a way to raise the debt ceiling to fund the government until the beginning of December. It’s only half-good news, as the deal only kicks the can down the road, without solving the problem. The headache will return in a couple of months, but the latest news helps soothe investor nerves, for now.
The mood in Asia was mostly positive, as well. Chinese CSI 300 gained more than 1% as China returned from its holiday. Caixin services PMI printed a surprise expansion in activity in September; both new orders and employment bounced back. Encouraging data helped soothe investor angst after the second property company Fantasia failed to service its debt at the beginning of the week.
All eyes are on today’s US jobs data. Released on Wednesday, the US ADP (NASDAQ:ADP) report revealed that the US economy added 568,000 new private jobs versus 430,000 pencilled in by analysts, giving investors hope that we may see a strong NFP figure today, as well. The consensus of analyst expectations on Bloomberg points that the US economy may have added 500,000 new nonfarm jobs in September. But there is no meaningful correlation between the monthly ADP and NFP figures, and we can’t rule out the possibility of seeing a negative surprise at today’s release.
The data is important, because it will help to shape expectations on what the Federal Reserve (Fed) could do next. We all know that the Fed is about to announce a start date for tapering its bond purchases, and reasonably soft data won’t get the Fed to change its mind. Only a shockingly low figure could do that – a figure below 100,000 for example, which would warn of an alarming slowdown in US labour market recovery. But even then, the Fed can’t do much, given that the latest spike in energy prices continues boosting inflation expectations, and the high inflation needs to be addressed quickly, perhaps more quickly than the depressed jobs market.
Speaking of energy prices, the decline in US crude following the Russian promise to increase gas supply to Europe boosted dip-buying. The price of a barrel rebounded as quickly as it fell. US crude continues flirting with the $80 per barrel, and it’s just a matter of time before we see the $80 resistance won over. The persistent rise in oil prices can only continue boosting inflation fears and the central bank hawks, hence limit the upside potential in case of a further recovery in stock markets.
The United States 10-Year yield approaches 1.60%, a level which could trigger a fresh wave of convexity selling, with Americans rushing to the exit on their bond positions to compensate for the lost interest in refinancing their old mortgages as a result of higher yields. As such, breaking above the 1.60% level could accelerate the rise in US yields, and further weigh on equity indices. A sharp rise in yields would hurt the growth stocks more than the value names.
All in all, now that we see a certain relief on the debt ceiling front, we also need to see a strong jobs print today to avoid all that from happening.