Shares in the US responded well to the prospect of ECB stimulus with fresh record closes on Thursday for the Dow 30 and S&P 500 and look to continue the forward momentum on Friday with a higher open ahead of the monthly employment report and a speech from Federal Reserve Chair Yellen.
Non-farm payrolls are expected to show 231K jobs created in October down slightly from the 248K created in September with the unemployment rate holding steady at 5.9% and average earnings expected to pick up slightly to rise 0.2% in the month.
In accordance with the level of central bank accommodation the markets having moved back and forth between “good data is good” and the new-normal scenario of “good data is bad”. This will be the first unemployment report since the Fed has ended quantitative easing and while bad data before might have led to a pause in QE tapering, that is no longer possible.
The feeling is that employment data would need to be a lot worse for the Fed to restart QE than it would have been to simply pause it so the direct consequence for markets of the data is now entirely centred around the timing of the first rate hike.
In its last statement the Fed painted a more upbeat picture of the labour market, saying that “underutilisation of labour resources is gradually diminishing”. The Fed is gradually shifting towards tightening monetary policy on the basis of a labour market that is strengthening and so will be looking to Friday’s report to confirm this.
Federal Reserve policy is not based on one month’s data. Should this month’s data be weak, this will not change the course of policy but markets are constantly repricing with new information and could react negatively to the prospect of the Fed tightening in a weakening economy.
On the other hand, should the data agree with the Fed’s more hawkish stance then this improves the chances of smooth transition from central bank stimulus to a strong economy as the reason for rising stock markets.
In essence, good data should be seen as good. The risk is that with markets so overstretched since rallying off the lows in mid-October; even if the headline number is good, some disappointing internals like average earnings, the participation rate or the percentage of long-term employed may give investors the excuse to head for the exits.
Futures suggest the:
S&P 500 will open 2 points higher at 2,033 with the
Dow 30 expected to open 22 points higher at 17,576 and the
NASDAQ 10 points higher at 4,174.
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