Non Farm Payrolls to Determine This Week’s Market Close
Equity markets are showing some strength into the end of the week, with European stock markets building on the biggest daily rally seen in the last month. These moves are something of a surprise, given their proximity to the next major event risk, which will come with this month’s release of the US Non Farm Payrolls report. These moves in stocks were also seen in Asian and US equity futures markets but most of the attention is being centered on the Stoxx Europe 600 Index, which is trading just under the 275 level and is close to printing its highest closing price since the beginning of the Summer (and a gain of nearly 3 percent on the week).
Investor optimism has been widely apparent in recent weeks, with futures contracts in the Standard & Poor’s 500 Index 0.4 percent, and the MSCI Asia Pacific Index seeing larger rallies of 2.2 percent (which is the biggest monthly rally seen so far this year). But looking ahead, the focus will turn back to macro data, as there has been little in the way of news headlines in recent sessions to guide investor sentiment. One of the primary reasons for this can be seen in the fact that additional rallies could be seen even if the jobs figures come in negatively for the month. If there are rallies in this scenario, they would come from changes in analyst expectations suggesting that the US Federal Reserve would have no choice but to inject monetary stimulus (in the form of a third round of quantitative easing).
Consensus Expectations for This Week’s Macro Data
Median forecasts, according to most of the major surveys,show that market analysts are expecting the US economy to have added 130,000 jobs during the month of August, which would be a marked decrease from the 163,000 additional jobs that were seen in July. But even with this slowdown in progress, the Unemployment Rate is expected to come in unchanged at 8.3 percent, as fewer workers maintain participation in the workforce. While this activity in Unemployment levels might be viewed as a positive to some, it should be remembered that the US unemployment rate has held above the 8 percent area for the last 42 months, so arguments that the US economy is comfortably recovering can be viewed as questionable.
Because of this, we can expect stock declines to be limited if data for the labor market does come in weaker than expectations, so contrarian investors can look to buy on dips if volatility does turn in that direction into the end of the week.
The S&P 500 has now seen a clearly break to new yearly highs, with prices currently trading just below the 1440 level. Buy positions can be taken on approach of support levels into 1390 but any breaks here would suggest that a short term top is in place and sideways consolidation likely to be seen.
About Richard Cox
University Teacher in International Trade and Finance. Specialty in technical/fundamental analysis of the commodities and currencies markets.