However, yesterday’s trade in the US and Europe needs to be viewed with caution. More than anything, relief rally comes to mind. Remember, US and European equities were sold off earlier this week and for most of last week. There is also the argument that the familiar month/quarter-end rebalancing could be at play here.
My colleague Chris Weston noted that a number of investment banks indicated that mutual funds are buying $20 billion worth of US stocks to re-weigh their portfolios. We also see in yesterday’s US session that there were demand in both equities and fixed income. The S&P 500 put on almost 2% while the 10-year treasury yields fell 1.4 basis points to 2.04%.
Although the ADP report printed a slightly stronger than expected reading at 200,000 versus 190,000 consensus, it is in line with the average number on a year-to-date basis at 196,000. This suggests that the significance of the data is low. Moreover, the government shutdown is seemingly averted, which will see financial participants focusing on Friday’s payroll data instead.
Overall, we should not put too much weight (and optimism) on the overnight equity outperformance. Nonetheless, Asia is set to start October on a positive note. There are however a couple of things to take note.
China is officially away for a week to celebrate its National Day. Despite this, the authorities are still releasing macro data, with the official PMI number, and the final estimate of the Caixin PMI due today. Given how sensitive the global markets are to all things out from China, these manufacturing numbers will be closely watched, and should continue to reinforce the slowing China narrative.
The economists are looking for another sub-50 reading for the state PMI, at 49.7, although the worry is whether it will undershoot the consensus, after the private PMI dramatically came in below the forecast, hitting the lowest since March 2009.
An upside surprise, however, especially if the headline number is above 50, could materially alter the macro view. Nonetheless, close scrutiny of the sub-components of the data is expected, with focus on output, new orders and inventories of raw materials.
Japan’s manufacturing data showed some mixed results. Tankan large manufacturing index fell to 12 in Q3 from 15, and undershot consensus of 13. On the other hand, the small manufacturing index was flat at 0, against expectations of a negative reading at -2, while large non-manufacturing index rose to 25 from 23, stronger than expected.
However, the outlook for the next survey was less optimistic. Yesterday’s industrial production dropped for the second straight month at 0.5% m/m in August, which strongly suggest that Q3 GDP may shrink again on q/q basis, implying a technical recession.
Should this come to pass, the Japanese government will campaign much harder for the BOJ to step up its monetary easing. The markets will also amplify their calls for BOJ to do more. That said, BOJ governor Kuroda is fairly confident that the inflation path is still on track, which hint that there is a mismatch in expectations.
It is worthwhile to point out that Kuroda-san is known for his surprise policy decisions. He did it in April 2013, as well as November 2014. He could do it again this time round.
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