Yet another confirmation

Thoughts of the Day

The US Non-Farm Payrolls report shows signs of a moderating job market. While August added 187k jobs (EXP 170k jobs), revisions to previous months reveal a weaker picture(Jun:185K->105K ; July:187K->157K, total 110K lesser jobs added). This could lead to the Fed keeping interest rates steady to let previous hikes filter through the economy.

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Week Ahead

Monday: Labour Day Holiday in the US and Canada.

Tuesday: 
The RBA is expected to hold interest rates in its monetary policy meeting at 4.10%.

Wednesday: The Australian GDP is expected to grow +0.3% Quarter-on-Quarter (vs +0.2% prev) and +1.7% Year-on-Year (vs +2.3% prev) in Q2. 

The Bank of Canada is expected to hold interest rates in its monetary policy meeting at 5.00%.

Thursday: The 3rd estimate for Euro Area GDP is expected to show that the economy grew +0.3% Quarter-on-Quarter (vs 0% prev) and +0.6% Year-on-Year (vs +1.1% prev) in Q2. 

Friday: The Japanese GDP is expected to grow +1.3% Quarter-on-Quarter (vs +0.9% prev) and +5.5% Year-on-Year (vs +3.7% prev) in Q2. 

The Canadian Employment Change is expected to show 18.7k jobs being added to the economy (vs -6.4k prev) while the unemployment rate is expected to remain at 5.5%.

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What Happened Yesterday

Market Movements as of New York Close 1 Sep 23 (3 Sep for Cryptos)
  • Fedspeak:
  • Mester (2024 voter, known hawk): “In the labour market, some progress is being made in bringing demand and supply into better balance, but the job market is still strong. Job growth has slowed and job openings are down, but the unemployment rate is low, at 3.8%.” Regarding inflation, Mester noted that it remains elevated, but she acknowledged that progress has been made.
  • The US Non-Farm Payroll was slightly better than expected with 187k jobs added to the economy (expected 170k). However, revisions to previous two months’ data show -110k less jobs added than initial estimates. Unemployment unexpectedly jumped to 3.8% from 3.5% (expected 3.5%) while the labour force participation rate grew to 62.8% (Vs 62.6% exp and prev). The 2-year US bond yield dropped from 4.84 to 4.77%. The US Dollar Index fell more than -0.2% from 103.67 to the 103.4 level while the S&P 500 futures rose around +0.20% from 4531.5 to the 4540 level.
  • The fall in US yields did not last following Mester’s remarks. The US Treasury Yield curve narrowed to 0.69% as the US 2 year bond yield rose +0.02% to 4.87 while the 10 year bond yield spiked +0.09% to 4.18% on the day.
  • Trading of the US Stock futures was muted in the Asian trading hours. However, some positive momentum started to seep in when the London trading session began with the S&P 500 futures rising +0.32% before the release of the NFP data. The NFP data then sent the S&P 500 futures rising another +0.24%.
  • The US stock market opened higher from Thursday as a result of the softer than expected employment data from the US. The US stock market then weakened through the New York session as Fed official Mester downplayed the unemployment data. Consequently, the S&P 500 closed the day higher at +0.18% (intraday high: +0.75%, low: -0.14%), the Dow Jones increased +0.33% (intraday high: +0.74%, low: -0.00%) while the Nasdaq slipped -0.07% (intraday high: +0.76%, low: -0.46%).
  • The crypto market traded within a range due to the lack of drivers in the crypto market. Bitcoin eked out a +0.1% gain while Ether fell -0.6%.
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Headlines & Market Impact

China says the best way to ‘de-risk’ is to restore stability with the U.S.


Notable Snippet: China’s Ministry of Commerce said Thursday that restoring stability in U.S.-China trade relations is the best way to “de-risk” — a twist to a term that’s become popular in international politics.

The word has been used by U.S. and EU officials as an attempt to position their countries as not completely separating from China in a decoupling scenario, but diversifying in areas where over-reliance on China poses a risk.

“We believe the best way to ‘de-risk’ is to return to the consensus agreed to by the two heads of state at Bali, return China-U.S. trade relations to a healthy, stable development path,” Shu Jueting, spokesperson at the Ministry of Commerce, said at a press conference in Mandarin, translated by CNBC.

That also “allows bilateral economic trade relations to better play the role of ‘ballast,’ stabilising business expectations and increasing business confidence for carrying out trade and investment.”

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EU economics chief says Europe is gripped by a ‘double crisis’ — but it can avoid a recession

Notable Snippet:  “I think we are facing the impact of the double crisis,” Gentiloni said in reference to the geopolitical impact from Russia’s full-scale invasion of Ukraine and the subsequent economic hit to the European continent.

“From a geopolitical point of view, [the crisis] impacted also, of course, the U.S. and all the world, but from the economic point of view, it impacted seriously Europe and Germany in particular,” he said.

The euro area, in the end, grew at a rate of 3.5% in 2022, according to the International Monetary Fund. The institution expects a growth rate of 0.8% for the euro zone this year and 1.4% in 2024.

However, recent economic data has raised concerns about a slowdown. For instance, European business activity contracted during August, to its lowest level since November 2020.

Inflation has eased in recent months, but the latest set of data showed the headline figure stable in August from the previous month at 5.3%. Though lower than earlier this year, it is still well above the European Central Bank’s target of 2%.

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Canada’s economy unexpectedly shrinks; central bank likely to hold rates

Notable Snippet: Canada’s economy unexpectedly contracted in the second quarter at an annualised rate of 0.2% and growth was most likely flat in July, data showed on Friday, a result that will probably allow the central bank to hold rates amid a possible recession.

The second-quarter reading was far lower than the Bank of Canada’s (BoC’s) forecast for a 1.5% annualised GDP growth as well as the 1.2% gain expected by analysts. June gross domestic product declined 0.2% from May, in line with forecasts.

“The Canadian economy may already have fallen into a modest recession,” said Stephen Brown, deputy chief North American economist for Capital Economics. The figures “leave little doubt that the Bank of Canada will keep interest rates unchanged next week,” he said.

The quarterly slowdown was largely due to declines in housing investment and smaller inventory accumulation as well as slower international exports and household spending, Statistics Canada said.

What we think: Lower prints in economic numbers is likely good for risk assets despite the increased recession fears as it puts the Federal Reserve on the backfoot when it comes to hiking further.

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Best,
Phan Vee Leung
CIO & Founder, TrackRecord