Themes
Risk only needed a better than expected US consumer confidence number to rally; a hint that every good economic data point will provide a relief rally at the moment. Nevertheless, we maintain our risk-off stance in general as we see further deterioration in the US (and world) economy.
ISM manufacturing is the intraday trigger today and we are actually expecting a better print (53.6) than consensus (52.8) though we maintain our stance that ISM manufacturing will go below 50 later this year. A better than expected ISM number is likely to drive the relief rally further.
What’s going on?
The manufacturing sector expanded by a slower rate in August than the previous nine months, we expect today’s ISM manufacturing report to show. The overall slowdown in the economy has been obvious over the summer and we expect it to continue heading into fall and winter. Practically all regional PMIs declined in August, which supports the notion of a slowdown in the manufacturing sector in August.
ISM manufacturing is not the only event risk today, however, as we are also treated to the nonfarm payrolls estimate by ADP. Consensus is looking for an increase in payrolls of 15,000 despite the very poor jobless claims reports and overall deteriorating economic data in August. We expect an increase of 5,000 and also forecast private nonfarm payrolls as estimated by BLS to show an increase of 5,000 on Friday. Overall this means that we currently look for an overall decline of 110,000 in nonfarm payrolls in August. The trend is clear, however, and we don’t expect employment to pick up materially in the coming months.
Market Musings
The Conference Board yesterday reported that consumer confidence rose to 53.5 in August from 51 in July, which was enough to spark a rally in risk despite a poor Chicago PMI. If we dig a little deeper the report was not as good as the risk rally seemed to suggest as confidence was solely driven by the expectations component, which rose to 72.5 from 67.5. The present situation compoent declined to 24.9 from 26.4 and the labour differential also fell again, this time to -41.9 from -40.7. The latter measures the difference between consumers finding jobs plentiful and hard to get.
Minutes from the August 10 FOMC meeting were not too exciting, but the FOMC did lower several forecasts, including GDP, which was revised down to the 3-3.5% range from 3.2-3.7% for 2010. Also the unemployment rate and various inflation measures saw negative revisions.
The Minutes put a temporary damper on risk, but it quickly recovered on the back of better AU and CH numbers. AU GDP rose 1.2% in 2Q (0.9% exp. and 0.7% prior) while Chinese PMIs rose to 51.7 and 51.9 from 51.2 and 49.4, respectively. Especially the numbers from Australia have been better in recent days, which have helped to AUD stage a comeback from the August 25 low.
Read the full Morning Note here.
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