PMI And Jobs As Stocks And Bonds Move Lower

The purchasing managers manufacturing surveys are the main economic news of the day thus far. Attention now turns to the US employment data. It is taking place amid an inflection point in the capital markets. While European equity market has turned lower earlier, the US has joined, with S&P gap lower opening last Friday and the follow through this week that has accelerated.

The Dow Jones Industrials are now down slightly on the year, though the S&P 500 is up 4.5% for the year, coming into today's session. The three largest European bourses, the FTSE, the DAX and CAC are 1.3%, 2.2% and 3.3% lower on the year. The Nikkei reached its highest level since January yesterday and gapped lower today. It is off 4.7% year-to-date.

The sell-off in equities is not lending bond markets support. European bonds yields were mostly higher on the week before today, and the sell-off has accelerated today. Moreover, the premiums over Germany are widening as rates rise. US 10-year Treasury yields are a couple of basis points firmer but are holding below 2.60%.

Given the magnitude of the sell-off in stocks and bonds, the fact that the dollar remains bid against the yen is noteworthy and suggests inter-market relationships may be changing. It also gives a greater sense that this is really a dollar move underway. Today's test comes in the form of US jobs data. Although the Markit PMI jobs component of softened, other data, including the weekly jobless claims, suggest the US labor market has accelerated. This does not contradict the Fed's assessment that "significant slack" remains.

The acceleration is evident in the average monthly gains over different time frames. The average of the past 12-month is 203k net new jobs. The six-month average is 222k, and the three-month average is 255k. The consensus expects around 230k, which would be the sixth month above the 200k threshold.

We are concerned the market has already discounted a strong report. There seems to be three possible scenarios here. First, the data is even stronger than the market expects as the US economic recovery from the dismal Q1 gains more traction. Under this scenario, the dollar may extend its gains. This would encourage speculation that Yellen may take a more hawkish line at the Jackson Hole confab at the end of August, where back in 2012, Bernanke provided a clear signal of QE3.

The second scenario is that the data, taken as whole, is largely as expected. We suspect this could spark buy the rumor, sell the fact type of activity. In the current environment, this would be a pullback for the dollar.

The third scenario is that the market is simply disappointed. This would be more clearly dollar negative. To the extent that the stronger Q2 GDP figures, improvement in the regional Fed surveys for July, the tick up in inflation measures this week (core PCE in Q2 GDP and employment cost index) have bolstered confidence of a rate hike in the US and possibly sooner than had been discounted has been the decisive market driver, than a disappointing jobs data could trigger a recovery in the bonds and stock market.

At a high level, the euro zone and UK manufacturing PMIs were softer, the Scandi bloc surveys were stronger, and China's was mixed (official one at highs for the year, while the HSBC flash estimate was revised lower). The euro zone July was unchanged at 51.8 from June, though the flash estimate was 51.9. Germany's final report came in a bit lower than the flash, but France came in a bit better, though still below 50.

The real new information though comes from Italy, where the manufacturing PMI slipped to three-month lows (though export orders improved) and Spain, which softened slipped to 53.9 from 54.6. Spain is poised to be the fastest growing economy in the euro area in Q2. It already reported a preliminary estimate of 0.6%.

While the euro area PMI did not do anything for the market, the weaker UK PMI has pressured sterling lower. Stale longs are continued to be forced to the sidelines. Lower highs and lower lows have been set since Monday. The 100-day moving average, which has held sterling pullback this year, has not been violated for the first time since last August. That area (~$1.6860) may now offer resistance.

Norway and Sweden's manufacturing PMIs improved. Sweden rose to 55.2 from 54.8, more than expected. Norway's reading rose back above the 50 boom/bust level to 50.6 after spending May and June at 49.6. Paradoxically, the the Swedish krona is stronger against both the dollar and euro, but the Norwegian krone is lower against both.

China's official PMI and the HSBC version stand at identical levels of 51.7. To reach this, the official measure improved from 51.0, while the HSBC flash measure was trimmed from 52.0. This lends greater credence to our assessment that Chinese official efforts have effectively engineered a soft landing. Separately, the India's manufacturing PMI rose to 53.0 from 51.5. For global investors, news that India effectively blocked the trade facilitation agreement at the WTO, seeking greater agriculture support, may be more significant than the PMI.