In is only fitting that a week that has been characterized by deteriorating macroeconomic data, and abysmal European data, would conclude with yet another macro disappointment in the form of Markit's sentiment surveys, for non-manufacturing/service (and composite) PMIs in Europe which missed almost entirely across the board, with Spain down from 58.1 to 55.8 (exp. 57.0), Italy down from 49.8 to 48.8 (exp. 49.8), France down from 49.4 to 48.4 (exp. 49.4), and in fact only Russia (!) and Germany rising, with the latter growing from 55.4 to 55.7, above the 55.4 expected, which however hardly compensates for the contractionary manufacturing PMI reported earlier this week. As a result, the Composite Eurozone PMI down from 52.3 to 52.0, missing expectations, as only Germany saw a service PMI increase.
Goldman's take: "Bottom line: The September Euro area Final Composite PMI came in at 52.0, 0.3pt weaker than the Flash (and Consensus) estimate. Relative to August, the Composite PMI declined by 0.5pt. The weaker Final Composite PMI was driven by a downward revision to the French Final service PMI. Today’s data also showed a decline in the Italian and Spanish service PMI."
From Chris Williamson, Chief Economist at Markit said [31]:
“The PMI suggests the eurozone economy remained stuck in a rut in the third quarter. After GDP stagnated in the second quarter, we can only expect modest growth of 0.2-0.3% in the third quarter based on these survey readings, with momentum being lost as we head into the final quarter of the year.
“There are certainly pockets of growth: Ireland’s economy is recovering strongly, Spain is seeing a still-robust upturn and the German service sector is providing an important prop to growth in the region as a whole. But the overall picture is one of a euro area economy that is struggling against multiple headwinds. These include a lack of domestic demand in many countries, subdued bank lending, sanctions with Russia and a reluctance of companies to expand in the face of an uncertain economic outlook.
“The survey showed growth of new orders sliding to the weakest for almost a year across the region as a whole, suggesting demand for goods and services is barely growing. Employment was held more or less unchanged again as a result, and a weakening in firms’ backlogs of orders suggests we could see headcounts start to fall again in coming months if this lack of demand persists.
“The waning of growth signalled by the PMI will apply further pressure on the ECB to broaden the scope of its planned asset purchases, to not only buy riskier asset-backed securities but to also start purchasing government debt.”
In other news, bad news apparently is back to being good news. So despite or rather thanks to this ongoing economic weakness, futures have ignored all the negatives and at last check were higher by 9 points, or just over 0.4%, as the algos appear to have reconsidered Draghi's quite explicit words and BlackRock's even more explicit warning that a public QE is just not coming, and seem to be convinced that his lack of willingness to commit is merely "pent up" commitment for a future ECB meeting. That or, more likely just another short squeeze especially with the "all important" non-farm payrolls number due out in just over 2 hours, which for the past 24 hours has been hyped up as sure to bounce strongly from the very disappointing, sub-200K August print.
Speaking of payrolls, the August jobs data better be revised much higher or all those pundits, with an emphasis on Mark Zandi, who said the BLS will have no choice but to revise the August print, will appear even more foolish than they already are.
But an even bigger question, is whether today good news will be bad news and vice versa, because lately it sure feels that the market volatility is surging as a result of concerns that the Fed may indeed hike rates once it is done with what is now just $9 billion more in POMO.
In other news, European equity futures trade in a holding pattern ahead of today's Nonfarm Payrolls release, with mild short-covering helping assist peripheral European stocks to recover from yesterday's sharp ECB-inspired losses. Germany's equity markets remained closed for Unity Day today, helping limit volumes on the final trading day of the week. Airlines perform particularly strongly in Europe, with easyJet shares trading at the highest levels since late June after upgrading their profit forecasts as the budget airline benefited from increased customer traffic after Air France’s pilot strike action over the past few weeks. Ahead of the US open, the E-mini S&P has risen about the 100DMA at 1946.25, helping assist the NASDAQ future toward 4,000.
After entering correction territory overnight, the Hang Seng Index in Hong Kong managed to close in the green, as an element of normalcy returned to the business district after the two-day market holiday. The Chief Executive of Hong Kong refused protesters calls to resign, however talks between the Hong Kong authorities and the protester leadership are due to take place in the coming days, hinting that a resolution could be in the pipeline.
Looking ahead we have trade data and the ISM non manufacturing reports but Payrolls will clearly be the main focus. The market is expecting a +215k and +210k print for the headline and private payrolls, respectively. Unemployment is expected to be unchanged at around 6.1%. DB's Joe Lavorgna notes that in both of the last two years, the gain in September nonfarm payrolls has been less than the trailing year-to-date monthly average. In 2012, monthly job gains averaged +179k through August but September employment was up +161k. In 2013, job gains averaged +197k but September employment was up just +164k. He thinks this may be due to issues surrounding teacher employment or survey length anomalies. However both years saw a strong rebound before year-end. So its worth baring this in mind ahead of today's figures.
Bulletin Headline Summary from RanSquawk and Bloomberg
- European equity futures trade in a holding pattern ahead of today's Nonfarm Payrolls release, with mild short-covering helping the E-mini S&P top the 100DMA
- Weak Eurozone PMIs highlight the continued headwinds to growth, knocking EUR/USD toward 1.2600, however Germany’s public holiday keeps volumes very light
- Nonfarm Payrolls expected to bounce back above the 200K level, with markets also looking for a positive revision to August’s particularly weak number
- Treasury yields rise overnight amid speculation payroll report (est. 215k) will spur selloff after previous two triggered rallies.
- Euro area economy is losing momentum as gauge of manufacturing and services activity fell to the lowest in almost a year, growth in new business is fading, and employment is at risk of declining, Markit Economics said today
- ECB president Draghi said yesterday that purchases of asset-backed debt will start before the end of the year and may include notes from the junk-rated nations of Greece and Cyprus
- BlackRock has bought short-term Spanish and Italian government debt on the expectation that the ECB’s offering of low-price loans to euro-area banks will keep interest rates from climbing
- UBS AG may be facing a fine of as much as €4.9b ($6.2b) in a French probe of allegations it helped clients evade taxes
- Firms holding swaps contracts with a bank filing for U.S. bankruptcy protection would have to wait at least 24 hours before demanding collateral under new practices that may be adopted by the industry this month
- It will take more than month before U.S. health officials will be ready to declare an end to the Ebola threat in Dallas, the head of the Centers for Disease Control and Prevention said yesterday
- Pro-democracy protesters in Hong Kong clashed with men who shouted abuse and removed some of their barricades, escalating tensions on the city’s streets as the government pledged talks to defuse the crisis
- Ben Bernanke said the mortgage market is so tight that even he is having a hard time refinancing his own home loan
- Sovereign 10Y yields mostly higher with Australia worst at +3.6bps. USD rises to highest level since June 9, 2010. Asian and European stocks mostly higher. U.S. equity-index futures rise. WTI crude, gold lower, copper rises
US Event Calendar
- 8:30am: Trade Balance, Aug., est. -$40.8b (prior -$40.5b)
- 8:30am: Change in Nonfarm Payrolls, Sept., est. 215k (prior 142K)
- Change in Private Payrolls, Sept., est. 210k (prior 134k)
- Change in Manufacturing Payrolls, Sept., est. 15k (prior 0k)
- Unemployment Rate, Sept., est. 6.1% (prior 6.1%)
- Underemployment Rate, Sept. (prior 12%)
- Average Hourly Earnings m/m, Sept., est. 0.2% (prior 0.2%)
- Average Hourly Earnings y/y, Sept., est. 2.2% (prior 2.1%)
- Average Hourly Earnings y/y, Sept., est. 2.2% (prior 2.1%)
- Average Weekly Hours All Employees, Sept., est. 34.5 (prior 34.5)
- Change in Household Employment, Sept., est. 235k (prior 16k)
- Labor Force Participation Rate, Sept. (prior 62.8%)
- Labor Force Participation Rate, Sept. (prior 62.8%)
- 9:45am: Markit U.S. Services PMI, Sept. final, est. 58.5 (prior 58.5)
- Markit U.S. Composite PMI, Sept. final (prior 58.8)
- 10:00am: ISM Non-Manufacturing Composite, Sept., est. 58.5(prior 59.6)
ASIA
After entering correction territory overnight, and dropping as low at 22,565 the Hang Seng Index in Hong Kong mysteriously soared, all the way up to 23,148, before it managed to close 0.6% in the green, as an element of normalcy returned to the business district after the two-day market holiday. The Chief Executive of Hong Kong refused protesters calls to resign, however talks between the Hong Kong authorities and the protester leadership are due to take place in the coming days, hinting that a resolution could be in the pipeline.
FIXED INCOME
After being knocked lower after the ECB’s policy update yesterday fell short of expectations, the IT/GE and SP/GE spreads have bounced back, tightening by 3bps apiece. Nonetheless, strength in Greek bonds has spilled over from yesterday as the ECB’s inclusion of BBB- debt in their Asset Backed Securities purchase program, as the GR/GE spread tightens by over 6bps.
EQUITIES
European equity futures trade in a holding pattern ahead of today's Nonfarm Payrolls release, with mild short-covering helping assist peripheral European stocks to recover from yesterday's sharp ECB-inspired losses. Germany's equity markets remained closed for Unity Day today, helping limit volumes on the final trading day of the week. Airlines perform particularly strongly in Europe, with easyJet shares trading at the highest levels since late June after upgrading their profit forecasts as the budget airline benefited from increased customer traffic after Air France’s pilot strike action over the past few weeks. Ahead of the US open, the E-mini S&P has risen about the 100DMA at 1946.25, helping assist the NASDAQ future toward 4,000.
FX
Eurozone PMIs have (with the exception of Germany) been revised lower, highlighting the continued weakness in the European growth picture and weakening EUR/USD to trip touted stops at 1.2620. GBP underperforms after services PMI fell below expectations, showing the tense geopolitical backdrop and weak Eurozone is still feeding into UK growth, however composite PMIs still indicate Q3 GDP growth of 0.8%
COMMODITIES
WTI and Brent crude futures trade flat in relatively directionless trade ahead of the US open. Nonetheless, platinum has extended the year’s sharp decline to hit the lowest level since late 2009 as expectations of Fed tightening continue to weigh on precious metals. HSBC say platinum group metals continue to be subject to investor liquidation, which is more than offsetting physical interest, adding that bargain-hunting may emerge if the platinum-gold spread contracts further.
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DB's Jim Reid concludes the overnight recap
We've had so many policy surprises from the ECB recently that the market was left a bit deflated by the lack of a furry rabbit being pulled out of Draghi's hat yesterday. As our European economist Mark Wall remarked he did not repeat last week’s key phrase – that the Council is ready to adjust the ‚size and composition? of purchases. He also seemed to de-emphasise the notion of targets for balance sheet size and the level of the currency. So it seems the council has moved back to wanting to see the impact of their prior policy initiatives before undertaking any fresh intervention. Mark Wall also remarked that this doesn't change their view of Government bond QE in 2015 as his team think the ECB's growth forecasts are too high and in time they will be forced to react to the likely disappointments.
At the end of the European session equity markets were in some degree of turmoil with the FTSEMIB, IBEX, CAC and DAX down -3.9%, -3.1%, -2.8% and -2.0%, respectively. For the FTSEMIB it was the worst day since February 2013 and for IBEX it was the biggest decline since early January this year. The S&P 500 hit its low (-1.03% intra day) at the European close before rallying all the way back to flat by the close. In reality there wasn’t a specific driver per se as data flow was mixed but the broader risk sentiment saw some support following the rebound in US small caps. There has been some focus on the underperformance in small caps lately so the first positive day for the Russell 2000 (+1.0%) after 3 long sessions of corrections earlier this week was a perhaps a reassuring sign. Echoing the intraday moves in equities Treasuries also unwound some of safe-haven flows earlier to close about 4bp higher in the 10yr (at 2.425%).
What was also impressive yesterday was the resilience in credit markets. European credit held in very well considering the scale of the equity sell-off (IG +1bp, Xover +3bp). However there was some discussion as to whether this was because investors don't want to short a contract that is about to roll (on Monday) and will quickly become less liquid. So we'll know more as to whether credit is remaining calm as of early next week. The resilience was also notable in the US credit market with the IG22 index 1.5bp tighter at one point before ending the day half a basis point tighter at around 64bp. The CDX HY index was fairly stable throughout the day before finishing one-eights of a point higher while the FINRA US HY corp bond index was up half a point in cash price terms.
This stability has occurred against a backdrop of further outflows from the asset class over the past week. Indeed the latest flow numbers are out and cover the period of Bill Gross’s career shift. Per EPFR’s data, US HY mutual funds saw outflows of US$2.3bn (-0.8% of AUM) during the week ending 1 October 2014. This marks the fifth consecutive week of outflows and the fourth biggest negative week since the first meaningful outflows in late June. Since then, we’ve witnessed 12 negative weeks (out of 16) for US HY and over US$26bn in cumulative outflows (or nearly 9% of AUM). Incidentally the WSJ reported on Wednesday night that PIMCO’s Total Return Fund saw a net US$23.5bn in redemptions in September (with bulk of it taking place last Friday).
Back to markets and turning to Asia, Hong Kong’s equity markets (Hang Seng -1.0%) continue to underperform the rest of Asia (Nikkei -0.3%, ASX 200 +0.3%). Investors continue to digest the implications of the ongoing prodemocracy protests. The good news is the protests over the last 2 days (public holidays in HK) were relatively peaceful. HK’s Chief Executive has rejected requests to step down but has assigned his deputy to meet and discuss with student group leaders on their calls for democratic reform. In response, one of the two main student groups said that the ‘occupation’ of key parts of HK would continue and the outcome of talks would determine whether they adopt more aggressive tactics (NYT).
On this topic, DB’s Michael Spencer has published a note outlining his thoughts and assessing the impact of the event. The retail sector is clearly a key loser via reduced spending and tourist flows. Interestingly he highlighted that HK’s stock market should be supported by the fact that 40% of market cap is in Chinese companies whose earnings should be little affected by this. Also he thinks that it may not be too much of a stretch to imagine that Beijing may feel less disposed to expand on its use of HK as a testing ground for capital account liberalisation as long as protests continue. The HK-Shanghai Stock Connect from further liberalisation of CNH markets could be delayed as a result of the deteriorating political climate.
Looking ahead we have trade data and the ISM non manufacturing reports but Payrolls will clearly be the main focus. The market is expecting a +215k and +210k print for the headline and private payrolls, respectively. Unemployment is expected to be unchanged at around 6.1%. However Joe Lavorgna notes that in both of the last two years, the gain in September nonfarm payrolls has been less than the trailing year-to-date monthly average. In 2012, monthly job gains averaged +179k through August but September employment was up +161k. In 2013, job gains averaged +197k but September employment was up just +164k. He thinks this may be due to issues surrounding teacher employment or survey length anomalies. However both years saw a strong rebound before year-end. So its worth baring this in mind ahead of today's figures.
