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Now All Market Hopes Hinge on Jobs Data as Recession Bells Ring

Bloomberg logo Bloomberg 10/3/2019 Justina Lee
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Lagging or leading, macro or micro, global or domestic. For investors, all that matters to keep the bull market intact is whether this week’s torrent of data is flashing a recession ahead or just a few local shocks.

In a market so divided on the outlook, every piece of data holds the prospect of vindication or rebuttal -- and numbers on Thursday just handed fresh ammo to the bears. A U.S. services gauge dropped to a three-year low in September and jobless claims rose more than expected, shortly after a euro-zone report showing a factory slump has spread to services.

All of that is adding to signs that the U.S.-China trade war is taking a toll on growth, and that dovish central banks may not be able to contain the damage. It could be key to resolving the contradiction across major assets that has defined 2019: Treasury yields are back near the lowest in three years, while U.S. stocks are about 5% from the all-time high and still enjoying the best year since 2013.

Friday’s payrolls report suddenly looks vital.

“The market has been a bit out of sync with economic indicators,” said Dirk Thiels, head of investment management at KBC Asset Management NV. “The global manufacturing sector is in a recession, and there are signs that this is possibly also infecting the rest of the economy.”

The big trouble comes when manufacturing and services PMI drop together © Bloomberg The big trouble comes when manufacturing and services PMI drop together

The Institute for Supply Management’s non-manufacturing index dropped to 52.6 last month, still holding above the 50 dividing line between contraction and expansion but missing even the lowest forecast Bloomberg survey.

Also this week: American vehicle sales numbers were poor and ISM’s factory gauge plunged, though construction spending showed signs of life even as it missed expectations.

All this explains why, under the surface, equity markets have been getting cautious again. After an abrupt rally in riskier stocks at the start of September, investors have returned to a defensive playbook.

The momentum strategy -- which has been stuffed with safer shares -- is back, as are low-volatility stocks. Highly leveraged companies are losing ground. The brief recovery in value shares, which tend to be more exposed to the economic cycle, has once again been halted.

a screenshot of a cell phone in the water: Momentum is back in vogue while volatile stocks drop again © Bloomberg Momentum is back in vogue while volatile stocks drop again

In the bond market, investors are taking few chances. Cash has flowed toward the safest government instruments, and the yield on 10-year U.S. Treasuries has dropped almost 40 basis points in less than a month to well below 1.6%.

At the same time bets for easier monetary policy have surged. Fed fund futures are now pricing in a more-than 80% chance of a rate cut this month, compared with less than 50% a week ago, despite some policy makers trying to paint an upbeat picture.

After two rate cuts from the Federal Reserve, the focus is on whether monetary officials have the firepower to breathe life into the global production cycle and stem the spillover into the service sector.

a screenshot of a cell phone: Treasury yields were falling again even before the bad data © Bloomberg Treasury yields were falling again even before the bad data

“It’s pretty much a given that the effectiveness of monetary policy is maxed out, in Europe and Japan,” said Peter Garnry, head of equity and quantitative strategy at Saxo Bank A/S. “The Fed has a bit of room for maneuver, but the transmission effects are quite small.”

The conflicted markets are on show beyond stocks and government bonds. Corporate debt sales are surging as borrowing costs drop, and investors are snapping them up in a hunt for yield. Still, the recent uptick in premiums for the riskiest American company obligations over investment grade underscores deteriorating investor sentiment.

On Wednesday, data from the ADP Research Institute showed private payrolls increased by 135,000 in September, the least in three months and less than the median forecast. Friday’s official jobs report may paint a fuller picture: expectations are for non-farm payrolls to rise 147,000, which would underscore the continued strength of the labor market that’s giving bulls ammo.

a screenshot of a video game: An uptick in premiums for junk credit suggests risks for stocks © Bloomberg An uptick in premiums for junk credit suggests risks for stocks

Even if the jobs data comes and goes without incident, it might not be enough to extend this year’s stock bull run, according to Jonathan Golub, chief U.S. equity strategist at Credit Suisse Group AG. The warnings from the manufacturing sector are impossible to ignore.

“While investors debate whether we’re entering a recession, we believe the backdrop is better described as a ‘semi-recession,’ a contraction in industrial activity accompanied by healthy economics elsewhere,” he wrote in a note on Wednesday. “Absent a re-acceleration in cyclical data, stock upside appears limited.”

--With assistance from Liz Capo McCormick.


©2019 Bloomberg L.P.

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