How Did The Markets React?
As was predicted, the combination of a number of market-moving events scheduled this morning put US markets in motion. Two particular indicators and the release of the December 12th FOMC minutes offered an evenly scattered economic calendar for short-term traders to respond to. The first piece of data to be fed to the fundamental hungry dollar was the ADP’s public employment survey. As Friday’s NFPs approach the usual speculation frenzy has found another report to nourish predictions. The first contraction in over three years suggests the recently stable government payroll reports could delivery a shock. While stocks, Treasuries and the dollar responded to the dour data, the bigger push was recorded after the highly anticipated ISM manufacturing survey. After factory activity contracted in November for the first time in three-and-a-half years, the sector joined housing as a harbinger of further economic malaise. However, like the home sales figures, the manufacturing number returned to positive territory in its most recent release, instigating a sigh of relief among the bulls. The level of concern over this specific component of the economy was obvious as all three markets responded with sizable moves. Finally, extending the typical length of the active New York session, the FOMC minutes offered an unexpected surprise. Predicted to undergo few changes, the body of the minutes actually fielded a bullish bias after the Board projected a rebound in the hammered down housing market while the inflation warnings went untouched.
Bonds – US 10-Year Treasury Note FuturesThe sluggishness in the Treasury market was quickly shed Wednesday as the capital markets opened for business and the economic calendar came online. From the reaction to the day’s top market-moving indicators, it was obvious that the question of ‘when interest rates would be cut’ was even more imperative today than it was over the past few months. The morning’s initial move was a set off by the week employment report, which has stirred whispers of a stalling labor market. While the opening move was sharp, it was also short lived. This was in observation of the impending manufacturing report. With investors honing in on the Fed’s repeated warnings of a slowing economy, the factory report is becoming a key element in the effort to turn group dovish. When the ISM rebounded in positive territory, rate cut expectations were quickly pared back. On the other hand, a forecasted cut will not be lifted by one indicator. This was evident by the unusual rise in T-notes after a decidedly hawkish FOMC minutes.
FX – EUR/USD
The US dollar saw itself sharply higher against major counterparts, as a bullish ISM manufacturing report erased weakness through early morning ADP employment data. A shockingly poor ADP December Employment figure halved the Greenback’s overnight gains, as traders expect that the proprietary labor data may accurately predict a poor Non Farm Payroll report. This bearish turn proved transitory, however, as stronger ISM Manufacturing news rescued outlook on the US industrial sector and boosted the currency. Headline manufacturing growth moved back into positive territory for the month of December, with ISM showing an unexpectedly strong reading at 51.6. Given that the strong result came on a jump in demand for manufactured goods, the report was especially significant in reversing the recent trend of growing inventories and slower sales.
The ISM-related dollar rally continued into the late afternoon, when a relatively hawkish FOMC Minutes release seemingly encouraged traders to liquidate long USD positions. Though somewhat counterintuitive, traders were perhaps unmoved by the Fed’s continued threats of persistently high inflation. In fact, interest rate-sensitive bond yields actually reversed their earlier gains to finish lower on the US market close. This all seems to suggest that traders will need considerably strong US data to keep the Greenback bid. Otherwise, dollar bears may pounce on any opportunity to short the USD, with key ISM Services due tomorrow and likewise significant Non Farm Payrolls data to be released Friday.
Equities – S&P 500 Index
Equities saw a volatile day of trade, as an earlier rally following ISM manufacturing numbers led to weakness following US-bearish FOMC minutes. Speculators clearly expressed their displeasure with the Fed’s hawkish tone, which emphasized that inflation remains the primary monetary policy risk despite slowing economic growth. Given a dour outlook on the broad economy and the lower probability of Fed interest rate cuts through the medium term, the S&P 500 index reversed an initial 0.8 percent rally to close 0.1 percent lower on the day. Market bulls subsequently hope that the broader indices can start the year stronger nonetheless, but this will greatly depend on upcoming ISM Services and NFP data. Given that the US Services economy accounts for nearly 80 percent of overall GDP, tomorrow’s report could prove far more significant and market-moving than today’s manufacturing release.