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Overnight the US services PMI index rose to 58.6; its highest read since August 2005 and well ahead of expectations as US economic momentum shifts into fourth gear. To put the US figure in perspective, Australia’s services PMI read was 39; its lowest print since April 2009, and is still contracting. Just like manufacturing, Australia’s economy seems to be spluttering as the rest of developed world drives off into the sunset.
The US services print was coupled with positive reads from the ADP non-farm payroll, with 176,000 positions added versus an estimated 175,000, however was softer than last month’s read. Unemployment claims fell to 323,000 over the week versus an estimated 332,000.
Drilling down into the services PMI data, the employment component is a real bright spot. It rose from 53.2 to 57.0 – this would suggest that the employment change could reach the 200,000 target quota over the month, a target figure that the Fed has been quoting as a reason to wind back monetary stimulus. The data triggered bond markets to fall and sent US ten-year treasury yields within one basis point of 3%; hitting 2.99% its highest read since July 2011 - credit is getting tighter and tighter. This is despite the fact central bankers are trying to talk down yields to get the economy spending.
However it must be noted that since the low in 2009, the non-farm payrolls have never beaten the ADP non-farm figures. Now it may finally do that tonight, however if the 200,000 jobs added mark is not triggered it may see the heat in treasury yields dropping out as bond investors reassess their positions for tapering.
With the release of the non-farm employment change and the official unemployment rate tonight, the prospect of tapering in 11 days time is growing ever larger (if the PMI data extrapolation is correct).
The data is also leading the equity markets to wander into higher territory, even with the prospect of tapering. It suggests that equity markets are asleep at the wheel with only $5.3 billion trading hands in the US last night; that’s a 12% discount to the 90 day average – the higher moves are a positive sign from reactionary point of view. However, we are getting to the top of the economic cycle and if we see signs of slowing in October after a possible taper from the Fed in September, the US equity market could retract very quickly.
Moving to the Asian region and macro data is also going to be the driver of market direction over the next five days.
The Australian election looks to be a fore gone conclusion; with every mayor newspaper in the land calling a coalition victory, barring The Age in Melbourne, and should not affect markets materially. It’s the data on Monday that is of most importance with the release of China’s CPI, PPI and trade balance numbers.
A CPI print well below 3.5% (the official estimates for CY2013) will ease fears of tightening to monetary policy that we witnessed over the May to July months, and with a soft CPI print – coupled with Premier Li Keqiang promising a GDP read above 7% for CY13 – China looks to be a driver of the Asian region rather than the break it was three months ago.
Ahead of the open, we are calling the ASX 200 up eight points to 5150 (0.15%), as the ASX again treads lightly, knowing it has outperformed the US markets. Yesterday’s trade was a clear example of investors being cautious to this fact, and with $5.1 billion trading hands it was a solid trading day.
BHP’s ADR is suggesting the stock will add eight cents on the open to $35.36; however having appreciated 15% in 9 weeks and having turned ex-dividend it may drift today as investors position themselves for US trade tonight. With iron ore unchanged it will have to wait for Monday’s china data before legging higher.