The PMI data remains
A place clearly lacking in gains
At least cross the pond
And Asia beyond
But will the US feel those pains?

The hard data hasn’t supported
That weakness, but is it distorted?
The latest we hear
Is NFP’s near
Revisions that show growth’s been thwarted

As market participants look ahead to Friday’s Powell speech at Jackson Hole, and seemingly more importantly to Nvidia’s earnings report and forecasts this afternoon, we must look at a few things that are going on in the economy.  The most noteworthy situation is that there remains, at least in the US, a wide gap between the survey data and the actual data.  We continue to see weak readings from the regional Fed manufacturing surveys, as well as PMI and ISM data, yet the key numbers, like NFP and Retail Sales continue to perform at a better than expected rate consistently.  While we await this morning’s Flash PMI data (exp Mfg 49.0, Services 52.2, Composite 51.5), which are essentially unchanged from last month’s readings and perhaps the best in the G10, there is a story this morning that the NFP data is going to be revised down by 650K jobs at the preliminary revisions today.  That is a huge adjustment and one that would certainly call into question the ongoing strength in the labor market.

It is not yet clear if it will impact the Unemployment Rate but if this story is accurate, it will almost certainly impact some of the thinking at the Eccles Building.  Consider that, after revisions, the seven NFP numbers have totaled 1807K so far this year, with the last two months showing 185K and 187K respectively.  If that 650K number is correct, and it comes from the past two months, then they will be revised into negative territory, a very different indication than anyone has considered to date.  However, even if it is more evenly spread across the year, it still represents more than one-third of the alleged jobs created.  This feels important to me.  While I have no way of determining if this story is accurate, it is important to understand it is making its way through the markets.  If this is the case, I would expect that the market’s view on the economy, as well as the Fed’s is likely to change somewhat.  

Arguably, the market response would be to alter pricing for interest rates going forward with more rate cuts priced in and priced in sooner than the middle of next year.  At the same time, though, former St Louis Fed President Bullard was interviewed by the WSJ yesterday and was crowing about how the market got the recession call wrong and the economy is doing much better than expected.  These diametrically opposed views are the norm in the markets these days, with no clear consensus that things are going to improve or worsen.  Again, it is this situation that informs why hedges for natural exposures are so important.

Turning to the other PMI’s released this morning, the story in Europe remains one of desultory growth or outright shrinkage.  The German manufacturing sector PMI printed at 39.1, better than last month’s 38.8, but still deep in recessionary territory.  While the French and Eurozone numbers were a bit better, they were both well in recession territory.  In fact, given the weakness of this data, and the fact that the ‘hard’ data in Europe has also been soft, the new narrative is the ECB is finished.  What had been a 50:50 probability for a hike in September has fallen to a one-third chance and if we continue to see weaker data, I expect that will fall further.  As to the UK, it also saw weak PMI data, with both Services and Manufacturing below the key 50 level, and the market has pulled back to just two 25bp rate hikes over the next 6 months despite the fact that inflation in the UK remains the highest in the developed world at 6.9% core, while the base rate sits at 5.25%.

It is not hard to look at this data and understand why the dollar continues to perform well.  Despite all the problems in the US, especially regarding the debt and massive interest payments, as well as the recent credit downgrade by Fitch, the US remains the most attractive opportunity around in the G10.  In fact, this is why that story about the massive downward revision in NFP data is so important.  Without it, the distinction is very clear, buy the USD, but if it is true, opinions are likely to change somewhat.

Turning to the overnight session, while most markets managed to do reasonably well in Asia, the mainland equity markets continue to suffer with the CSI 300 down -1.6%.  In Europe, the picture is mixed with some early gains being ceded and only the UK (+0.7%) managing to stay positive while the continent slips slightly into the red.  US futures, meanwhile, are barely in the green as all eyes await the Nvidia earnings after the close.

In the bond market, it is a one-way street with yields falling across the board and in a meaningful way.  Treasuries are actually the laggard with yields only down by 5bps while European sovereigns have seen yield declines of 9bps and UK gilts of 11bps.  Clearly, the bond market is responding to the weak PMI data and anticipating weakness in the US as well.  One other interesting thing is that the yield curve inversion, which had been unwinding for the past week or two, widened again yesterday and is back above the -75bp level, having traded as low as -65bps just a few days ago.

Recession is the view in the commodity space as well, at least in energy, as oil prices (-1.5%) fall again and are now back below the $80/bbl level.  Stories of more Iranian crude making its way to the market as well as fears over reduced demand are having an impact.  Interestingly, the metals markets are holding up this morning with both base and precious varieties all in the green led by copper (+1.0%).  This is a harder outcome to square with the recession fears.

Finally, the dollar is doing quite well this morning, which given the growing risk-off attitude makes some sense.  Vs. the G10, only the yen (+0.25%) has managed any gains, and they are small.  Meanwhile, the rest of the bloc is weaker across the board led by the pound (-0.9%) and NOK (-0.9%) for obvious reasons.  In the EMG bloc, ZAR (+0.5%) is the lone gainer of note after South African data implied better times ahead.  On the flipside, though, weakness is broad based with APAC, EEMEA and LATAM currencies all under pressure amidst the risk sentiment today.

Yesterday’s Existing Home Sales data was a bit softer than expected and as well as the PMI data due, we also see New Home Sales (exp 703K) and that NFP revision.  Clearly, all eyes will be on that last piece of data given the rumors of a large decrease.  So, we will need to see how that comes.  If it is benign, then I expect risk appetite may return as the bulls look for a big Nvidia story this afternoon.  However, if that huge revision appears, I suspect risk will remain in abeyance for now.

Net, nothing has changed the medium-term view of dollar strength, but the day to day remains open to the news.

Good luck

Adf