Intraday Market Thoughts

Reality Check Pre Jobs

by Adam Button
Dec 6, 2019 12:37

As we turn to the November jobs reports from the US and Canada (more below), here are some considerations. There are three (simplified) phases to an economic turn: Phase 1 is deterioration--As the economy softens, there's no telling where it will stop and fear takes hold; Phase 2 is flattening-- This emerges alongside policy action, such as a rate cut and stabilizing econ data. Phase 3 is improvement. Which phase are we in?  Below are charts on 2 of our existing Premium trades. A new Premium trade was issued yesterday evening.

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Reality Check Pre Jobs - Dax 4 Hrs (Chart 1)

We're clearly Phase 2, but today's markets attempt to front-run everything, while pushing the narrative about a stronger 2020 economy. The data isn't there yet. Aside from some Chinese fogures– usually unreliable – there isn't global turn. Manufacturing remains especially weak and just today German factory orders were down 0.4% in October and down 5.5% year-over-year. Even in the US, this week's ADP and ISM data was all on the soft side.

Most central banks have bought into the idea of a turn and now the looming threat for 2020 is that global growth remains sluggish. Even if data begins to tick higher on better consumer spending there needs to be business investment to generate any lasting uptick. The hope is that a US-China trade deal will spark some fresh investment but that's probably unrealistic. A a phase one deal isn't going to remove the uncertainty, especially with a US election looming.

What's needed is more-aggressive stimulus from China to follow a phase one deal. In the Chinese press Friday there was more talk of an MLF cut, which would likely be combined with a loan prime rate cut and that's the key lever the PBOC is using now. Better would be a package of rate cuts, easing lending restrictions and fiscal stimulus. Something along those lines from Europe would be helpful as well.

But is it realistic?

That will be something to ponder in the weeks ahead. In the day ahead, the Canadian and US jobs reports are due. US non-farm payrolls are forecast at +183K but the risks are to the downside after ADP. Still, a miss will probably be brushed aside due to skews from the GM strike.

The more-tradeable data could be from Canada where the consensus is +10K (as always). We wrote recently about a wide divergence between the employment survey and the lagging payroll survey. There are more than 100K 'extra' jobs in the employment survey and the risk is some of them disappear on Friday.


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