Markets trading thin ahead of US NFPs

A lacklustre night of market action

The Independence Day holiday in the US kept trading activity relatively thin. The ASX 200 clocked another new-high, breaking the 6700-level for the first time since November 2007, led by a big, broad-based bounce in the shares bank’s stocks. Equity markets across the global generally eked-out gains for the day, while bond yield were reasonably steady. The Yen and Swiss Franc were the slight outperformers in the G10 currency space, while commodity currencies slipped, presumably as risky positions were closed-off for the day-off. With this as the market’s overnight lead, SPI futures are indicating that the ASX 200 ought to open around 5 points higher this morning.

Local Retail Sales met with a shrug

Australian Retail Sales data for May was the highlight of yesterday’s trade, but it amounted to little more than a little fizzle as it applies to market action. Both the monthly and annualized figure disappointed expectations: sales expand by a modest 0.1% for the month, and only 2.4% for the year. Consumption sensitive sectors on the ASX barely moved, while the AUD briefly whipped about, but actually floated higher after the release. It would seem here, the data offered little new information, in light of Tuesday’s RBA cuts: the print, as soft as it was, hasn’t fundamentally changed rate expectations.

The week reaches its climax

US Non-Farm payrolls data marks the climax to the week’s trade – and could spark some fireworks, given trade is expected to be thinner tonight, due to the hangover from the US Independence Day holiday. Economist estimates are suggesting a solid, though not spectacular, month of June for the US labour market: 160,000 jobs are forecast to have been added, which ought to maintain the US unemployment rate at its half-a-century low of 3.6%. Most significantly for econo-buffs and Fed watchers: wage growth is also expected to have picked-up, to a rate of 3.2% on a year-on-year basis.

The last NFPs before the next Fed meeting

The significance of this US Non-Farm Release can’t be underestimated. This is the last US labour market health-check for market participants before the next US Federal Reserve meeting on July 31^st. It’s an extraordinary thing to conceive, but even despite what is an incredibly robust jobs market, the Fed is expected to cut interest rates by 25-basis-points (perhaps even 50) at this meeting. And it’s due to the fact markets are being discreetly told that the US economy requires an “insurance cut”, in order to manage the projected slowdown in the US and global economy, and the unfolding consequences of the US-China trade-war.

A good Greenspan, or a bad Greenspan

Is this much of a rationale for a rate cut, considering the Fed’s mandate? The answer is ambiguous and open for debate. But what is becoming clear is the Fed’s strategy and core motive: they are trying to engineer what might be called a “Greenspan-’95-manoeuvre”, in order to avoid a “Greenspan-’05-mistake”. That is: pre-emptively cut interest rates in the middle of an intended hiking cycle to stabilize financial markets and the US economy, like the Fed did in 1995; instead of pushing forward with rate hikes and precipitating a deterioration in financial conditions (and subsequently the “real economy”), like the Fed did in the mid-noughties.

The hope for a soft landing; the desire for liquidity

The comparison to current circumstances isn’t perfectly comparable; but financial markets are betting-on the sort of soft landing in the US economy that the Greenspan-led-Fed achieved in 1995/96. It must be said: history and hindsight suggest that this move ultimately amounted to a big kick-of-the-can down the road and probably fuelled, in part, the late-90’s Dot-Com boom; and (arguably) sowed the seeds for the Global Financial crisis, beyond that. But despite this grizzly history, financial markets are notoriously “short-term-ist” in this age of cheap money and moral hazard; and care little for sensible long-term policymaking. Markets want liquidity, and want more of it, more-or-less, now.

The best-case for the bulls

Broadly, this is how tonight’s US Non-Farm Payrolls data ought to be viewed. The best-case outcome for market bulls is a slight miss in the jobs-gained number, perhaps a dip in wages growth, and maybe even a small climb in the unemployment rate. This would be seen as the impetus for an “insurance cut” from the Fed, and open the likelihood of easier financial conditions. If the market reacts by increasing the chances of a 50-basis point cut from the Fed, then the S&P 500 likely rallies; the USD falls with Treasury yields, lifting the AUD; and gold prices begin a foray to fresh multi-year highs.