US NFPs settle traders' nerves

A positive end to a volatile week

Investors took a small sigh of relief on Friday night, after US jobs data affirmed that at least for now, the US economy isn’t cascading into recession. The data certainly didn’t change market participants’ “directional” view of the trend of the US economy. Expectations remain for a gradual US economic slowdown, that the Fed must cut rates to address. Nevertheless, stock markets still rallied on Friday, setting the ASX 200 up for gains this morning. Friday’s local trade was preoccupied with domestic Retail Sales data which revealed a so-so set of numbers. It sets up another big week ahead, which will be dominated by political and central bank news.

US jobs data calms nerves

US Non-Farm Payrolls data brought investors back towards their view on the US economy, held before the release of last week’s underwhelming US PMI data. That is: the US economy is slowing, but it isn’t tumbling into recession, yet. Funnily enough, the lukewarm set of data had some pundits calling the labour market figures in the US a “goldilocks print” for the US stock market. It wasn’t so bad that it signals an imminent contraction for the US economy, yet it was weak enough to maintain the view that the US Fed will have to cut rates very aggressively to manage a tangible slowdown.

US jobs: in the numbers

As far as the numbers go: the total jobs added to the US economy, at 136,000 last month, was in line with expectations; wage growth was flat, missing estimates; and the unemployment rate actually fell to 3.5% – a fifty-year-low. The takeaway from this is that US business is still hiring, albeit at a slower rate; and the US labour market is still at notionally full employment, though it’s not so tight that the risk of a wages and inflation break-out is on the cards. It implies that US business still possesses capacity to grow, however there remains room for the Fed to keep cutting rates.

Markets still betting on an aggressive Fed

The overall view that the US economy is on solid footing, but needs a shot in the arm from monetary policy was backed up by a speech from US Fed Jerome Powell on Friday night. To condense the message: “While… the US economy faces some risks, overall it is… in a good place.” There was little prescription regarding the Fed’s likely next move. Market participants didn’t seem bothered by that though. As it currently stands, the rate-cuts baked into the market after last week’s poor US PMI data are still there, with the implied probability of an October cut from the Fed considered a 70% chance.

Retail Sales misses, but only slightly:

The local data flow on Friday was met with a shrug, though it bares mentioning. Australian Retail Sales data came-out, and although it missed expectations slightly, proved close enough to the mark for investors. The top-line figure showed retail sales growth of 0.4% last month, just shy of the 0.5% estimated, with growth in the consumption of clothing, food and household goods underpinning the expansion. Following flat growth in consumption the month prior, the data pique hopes that the monetary and fiscal stimulus applied to the economy in the past 6-months is starting to have some, small impact.

Retail Sales simply removed a roadblock

Though some commentary was to the contrary, there was little meaningful change in market perceptions of the Australian economy off-the-back of the Retail Sales data release. The ASX 200 did rally after it printed, however this was neither due to a greater optimism towards economic growth, nor the greater likelihood of RBA rate cuts. The implied chances of an RBA cut for November were practically unchanged, keeping the AUD and Australian bond yields flat post the release. The half-a-per cent rally on the ASX 200 was probably, mostly due to just one risk-event being removed from the market, at a time when market sentiment remains quite fragile.

The week ahead highlight by US-China trade-talks

Politics and central bank commentary will be the theme this week. The US Fed releases the minutes from its last meeting, and the ECB will do the same. There’s a speech also due to be delivered by Fed Chair Jerome Powell. The high impact news will come in the form of high-level US-China trade talks at the end of the week. Most of what’s been in financial markets in the last week finds its roots in the uncertainty brought about by the US-China trade-war. Market participants are hoping for a break-through in US-China trade-relations, to give some chance for the global economy to make a turnaround.