Tuesday 27 September 2016

Daily Market Update: Financial markets set for 'Super Thursday'

Richard Ramsey

Published 05/11/2015 | 14:48

There was no shortage of incoming economic data over the past 24 hours and that trend is set to continue in today’s session.

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Yesterday’s key release of the day was the US ISM non-manufacturing report. The ISM nonmanufacturing index rose from 56.9 in September to 59.1 in October, fully reversing September's drop and underscoring the resilience of the domestic economy. Remember with these PMI reports, 50 is the threshold between expansion (>50) and contraction (<50). The higher the number (>50) the faster the rate of growth. Significantly, the employment measure moved up from 58.3 to 59.2, the second highest level (after July's 59.6) since August 2005. This barometer, which is statistically correlated to payroll growth in non-manufacturing industries, suggests a better employment trend than has been reported within the official non-farm payrolls reports. As such, this bodes well for tomorrow’s labour market report with the potential for a net gain in payrolls in excess of 200k. Yesterday’s ADP private sector employment report revealed a net gain of 182k jobs in October. This was slightly better than the 180k gain expected.

Overall, yesterday’s ISM non-manufacturing report helped to raise expectations of a Fed rate hike next month with the dollar strengthening on the back of this news. Yesterday Fed Chairwoman Janet Yellen said the Federal Reserve may raise short-term interest rates in mid-December so long as the U.S. economy remains on track. Her remarks were echoed later by NY Fed President William Dudley (voter), who described December as a “live possibility” for a rate increase but added, “let’s see what the data shows”. Today’s US economic calenda is relatively light with a number of Fed officials due to speak. The Fed’s Vice Chair, Stanley Fischer is scheduled to speak today with his FOMC colleagues Dudley, Lockhart and Tarullo all speaking at separate events.

Yesterday’s ISM non-manufacturing report helped push the dollar higher against both the euro and sterling yesterday. Despite an encouraging UK services PMI, sterling slipped below $1.54 yesterday and continues to trade below this level this morning. Meanwhile the single currency continues to lose ground against both the greenback and sterling. The ECB and the Federal Reserve are at different stages of their respective monetary policy cycles. The former looks set to add more stimulus (negative for the euro) whereas the Fed is looking at withdrawing some stimulus through a rate hike (positive for the dollar). EUR/USD hit a 3-month low of $1.083 yesterday, 1 cent lower than its open. However, it has subsequently risen to $1.0880 this morning. EUR/GBP opened yesterday at 70.9p and has already tested 70.4p this morning. This is a far cry from the 74.9p level just 3 weeks ago. Sterling will be particularly sensitive to event risk linked to today’s “Super Thursday” Bank of England news. The prospect of the BoE pushing back its interest rate expectations is likely to see sterling give up some of its recent gains.

First up on “Super Thursday” is the Bank of England, Monetary Policy Committee (MPC) decision and minutes. The expectation is for the MPC to leave policy settings on hold in November with a repeat 8-1 vote on Bank Rate, with Ian McCafferty once again the sole dissenter in favour of a 25bp rise. There is a risk of an additional dissenting vote (Martin Weale or, perhaps, Kristin Forbes) but economic and financial market developments over the past quarter have not obviously forced the pace of policy tightening / it is not at all obvious what factor(s) would have triggered any change in any MPC members’ votes. The Bank of England also releases its Quarterly Inflation Report (QIR) at midday with Governor Carney leading the subsequent press conference at 12.45pm. If Governor Carney’s most recent comments are anything to go by (“if …rate rises are not appropriate, then we will do the right thing and we will not adjust rates”) the press conference following today’s QIR is likely to adopt a cautious tone. Global downside growth risks have escalated in recent months. A backdrop of uncertainty is likely to result in the central message that a Bank rate rise is likely in 2016, but the risks in terms of the timing of lift-off have shifted towards the middle of the year from Q1 2016.

Yesterday’s Eurozone service and composite (manufacturing & services) PMIs for October were broadly in line with the earlier flash estimates. The final services PMI reading, at 54.1, was an improvement on the previous month’s figure (53.7) and remains close to June’s recent high (54.4). Meanwhile the composite PMI edged up from 53.6 in September to 53.9 last month. Again this remains close to August’s recent high of 54.3. This morning we have seen disappointing factory orders figures from Germany. The Eurozone’s largest economy has posted three consecutive months of falling orders with September’s decline 1.7% m/m. A 1% rise had been expected by analysts. The German construction and retail PMIs are also due this morning with September’s Eurozone retail sales figures the key release of the day. ECB President Mario Draghi is also due to speak at an event this morning. However, given that he has already hinted at more ECB policy stimulus next month there i perhaps little scope for new news.

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