Apparently, bad news is good news, again - or at least it is, for now

Stocks to bounce back, as week reaches climax

The bleeding for Wall Street equities was staunched somewhat overnight, with the S&P 500 bouncing back above 2900 during the North American session. This came despite a miss in last night’s US Non-Manufacturing PMI data, that only added to worries of US economic slowdown. It appears that the run of poor US data is boosting the odds of rate cuts from the Fed, and therefore driving money back into the stock market. The ASX 200 ought to follow Wall Street’s lead, and open higher this morning. Both locally and abroad, the data docket is dense: local retail sales data is released today, and US Non-Farm Payrolls is released tonight.

Another kick in the guts for the US economy

From the get-go yesterday, market sentiment hinged on the outcome of US Non-Manufacturing PMI data. Following Wednesday’s US ISM Manufacturing PMI data shock, investors were keen to know whether the malaise infecting US manufacturing is seeping into the services sector. Lo-and-behold, it seems to be. At 52.6 (versus a forecast of 55.1) US Non-Manufacturing activity is at its weakest since 2016. The much weaker than expected print, what’s more, has taken the composite PMI number in the US – that is, the combination of both manufacturing and non-manufacturing activity – to 50.2. Business conditions in the US economy, based on this metric, is slipping into total contraction territory.

Stocks jump on “bad news is good news” dynamic

Wall Street stocks tumbled at the open of North American trading session. However, after the early swoon, the S&P 500 managed to bounce back, to grind higher throughout Wall Street trade, to close 0.7% higher for the day. The rally was paced by US tech stocks, with the NASDAQ, for example, jumping over 1%. Last night’s rally has proven one of those counterintuitive moves in the stock market. For all the week’s doom and gloom, commentators are chalking-up the jump to the old “bad-news-is-good-news” dynamic. That is: bad economic fundamentals equals interest rate cuts, which means more cheap money to throw at stocks.

Markets betting on very aggressive Fed

This explanation checks-out based on pricing in interest rate markets. Markets participants are all but certain the Fed will cut interest rates again this month. As it stands, it’s considered an 87% chance. On top of that, traders are betting that the Fed will have little choice but to begin a prolonged cutting cycle, which will see the Fed funds rate slashed 4 times, to below 1.00%, before the end of 2020. The expectations for such aggressive policy intervention from the Fed drove US Treasury yields lower overnight, with yields dropping 6-10 points across the curve.

Lower rates bolsters US stock market

And therein lies the reason for the US stock markets rally: the fall in bond yields has juiced equity valuations, and driven flow back into stock markets. It exemplifies nicely the tale of global stock markets in 2019: a year of strong returns, not underpinned by fundamental earnings growth, but because of falling global interest rates. In time, these might one day be considered the halcyon days. That’s because unless lower interest rates successfully stimulate economic growth, then earnings growth will continue to fall. In the bigger picture, that’s what sustains stock market returns, and will ultimately determine the trajectory of global equity indices.

US NFPs could mean week ends with a bang

High impact economic data keeps coming out of the US, today. In fact, it will be the biggest release for the week: US Non-Farm Payrolls data. The core concern here is whether the tangible weakness in US business activity is seeping into the US jobs market. Investors are, of course, on recession watch, and if that concern proves valid, it adds to the notion that the US economy is right at the end of this business cycle, and on the precipice of a recession. US jobs growth has been slowing down lately, that much is accepted. Tonight’s data will be judged on whether this slowdown is becoming more severe.

RBA to closely watch today’s Retail Sales data

Australia gets its own dose of high impact data today, too. Retail Sales are released this morning, and will give a health-check on the sickly Australian consumer. Economists are forecasting a robust 0.5% expansion in retail activity in the economy last month, up from the previous month’s contraction of -0.1%. The biggest risk, we’ve all been told by the RBA, to Australia’s economic wellbeing is the weak state of consumption. The RBA’s decision making therefore rests considerably on what Retail Sales data reveals. If the data undershoots again today, the fifty-fifty chance traders are giving to a rate cut in November can only rise.