Today markets will try to come to grips with yesterday’s European Central Bank meeting. While the knee-jerk reaction was disappointment, market watchers might begin to second-guess the next monetary policy steps that the ECB will take – and what the announced Asset-backed Securities Purchase Programme (ABSPP) will actually mean (see Garnry, Pope, Huopainen).
In the US, the Federal Reserve’s next meeting will be on October 29 and 30, and today’s September employment report is an important data point in deciding whether we will get advance warning of the timing of the first rate hike.
Germany’s public holiday will probably limit market action today, and early next week eyes should be turning toward the International Monetary Fund’s annual meeting to be held from October 10 to October 12. Expect more on that after the weekend.
Eurozone September Service Purchasing Manager Index (08:00 GMT)
The September service purchasing manager index (PMI) is expected to come in at 52.8, unchanged from the earlier reported flash estimate, but below the 53.1 reported for August. The manufacturing PMI published earlier this week showed a surprise drop to 50.3 from the flash estimate of 50.5, so the last-minute consensus might be prepared for a lower final service PMI as well.
Given that the Eurozone manufacturing PMI is teetering near the zero-growth 50-level, a lower service PMI would confirm the weak economic outlook. With monetary and fiscal policy locked for the next couple of months, weakness in stock markets could be the end result.
Note that country-specific readings will be published earlier, and market prices of financial assets will probably be adjusted accordingly before the Eurozone-level data is released. The schedule for country-specific service PMIs: Spain 07:15, Italy 07:45, France 07:50, Germany 07:55, all times GMT.
US September Employment Report (12:30 GMT)
The consensus expects moderate growth in employment in this report, with non-farm payrolls increasing by 215,000. This is higher than the weak 142,000 in August, and in line with the average monthly gains over the past couple of years. The unemployment rate has remained unchanged at 6.1%. Other indicators below the headline indicators suggest a slow but steady recovery in the labour market is likely, with little indication of wage inflation threat.
Even though the low unemployment figure puts some pressure on the Federal Reserve to introduce the first rate hike in the near future, there is still slack in the labour market, and with the recent weakness in global economy, the Fed might not be in a hurry to signal tightening.
This reminds me of the September 2013 Fed meeting, when it decided to postpone tapering the monthly asset purchases, contrary to expectations. I am pretty confident that the Fed will tread lightly, and the markets might be surprised to see a more dovish Fed at the October meeting. See the excellent preview from Saxo's Bank's Mads Koefoed for more.
The consensus forecast is for the non-manufacturing PMI to stay unchanged at 58.5, but after the surprisingly steep fall in the manufacturing PMI yesterday, a lower number is likely. The two indexes have a tendency to be relatively closely correlated, and divergence between the two should be short-lived. Before yesterday’s release, some analysts commented that the high PMIs point to “an end of the great stagnation”. But it seems the reality is not that rosy.
Still, both PMI indexes remain well above the 50-level, and are back to levels seen a couple of months ago. So there is not really any drama here. In terms of the market reaction, even a small dip can have notable consequences. If the consensus view was that the economy was accelerating to escape velocity, with a rosy outlook for corporate earnings and higher inflation outlook, such views should be reassessed.
The key question is whether this dip in the PMIs will turn out to be a temporary setback, or become the new normal. At least the economic surprise index has turned down from relatively high levels, and is heading downwards. This suggests bonds could outperform stocks in the near term.
Assuming the economy is softening up in the US, the Fed’s rate hikes are slowed down, and the ECB’s balance sheet expansion does not proceed as planned, the EURUSD could see a determined move higher as well. The markets have a nasty habit of occasionally surprising almost everyone. This might be one of those times.