The Fed’s monetary stance has been sufficient proof that the bearish take on the US stock market is most likely inaccurate. In October, the US labor market expanded by 250R jobs, which significantly exceeded the forecast of 200K. Wages rose by 0.2% which was in line with expectations. Concerns about Hurricane Michael turned out to be unfounded, as it had no discernible effect on job growth. The manufacturing sector, the most vulnerable sector to the effects of foreign trade, created 32K jobs. It is also important that, at the same time, there is a tendency of growth in the demand for qualifications associated with the production of durable goods.
All sectors of the economy made a positive contribution to employment, while the growth leader was the medical services, education and social assistance sector which created 46.7K jobs.
The dollar maintains strong position against other major currencies on Monday, inspired by the success of the Friday report and strengthened expectations regarding the Fed’s decision in December. However, the probability of a fourth rate-increase this year increased slightly to 72.1% after the NFP release, the main risk that market players are now pricing in futures prices is a continued correction in the US stock market and the Fed changing course under pressure from the market expectations.
Another evidence in favor of a strong labor market is the quenched volatility on the VIX, which dived below 20 points on Friday. The long-term average level of the indicator is estimated at 14-15 points and the index usually returns quickly to its average, as soon as market expectations stabilize and a panic sell-off abates.
On Friday, the main US indices closed in red, losing less than 1%, indicating the growing confidence of market players that the Fed will continue to tighten its policy. Now it is natural for markets to expect concessions from the Fed to extend rally solely on soft policy expectations. Investors do not trust economic success to be a reliable catalyst for the growth of the stock market, so on Monday, moderate declines resumed. Futures on the S&P 500 fell slightly, while growth in defensive assets remained weak.
The pullback in Asian markets was supported by alarming data from the Chinese economy. The mixed index of activity in manufacturing and services in China (Сomposite PMI) fell to 50.8 points, contrary to the forecast of 52.8 points, which was the lowest value since June 2016. Company managers reported that new orders in services fell to the lowest level from February 2016, a key figure of 50.3, which in turn speaks of barely contained recession risks in the economy.
To support the economy, China will have to quickly increase imports, which the Chinese Prime Minister Xi recently promised to do. The Chinese yuan moved to decline on Monday after a week of strengthening, as economic data suggests a weaker fundamentally justified exchange rate of the Chinese currency against the dollar.
The managed exchange rate of Yuan suggests that periods of strengthening should be written off to foreign exchange interventions from PBOC, as the state of the economy and market sentiment dictate the need for the currency to depreciate, presumably above 7 yuan per dollar.
The slump in the oil market will curb inflationary impulse in the global economy, and this will have a particularly strong impact on the eurozone economy, where a significant proportion of inflation is accounted for by fuel prices. Bullish plans in the oil market had to be postponed after the latest data showed a sharp acceleration of production in the United States, Russia and Saudi Arabia, and the US administration decided to bypass Saudi Arabia, allowing some countries to buy oil from Iran.
Accordingly, the issue of shortage in the market is off the agenda. Oil prices have been falling for the whole month in a row and now the struggle will unfold at the level of $70 for Brent and $60 per barrel for the American WTI grade. It is difficult to talk about the changes of global demand and its prospects, since the market is under pressure from the supply side and is fully engaged in interpreting hints from global producers, therefore talk of a bearish oil market as a harbinger of a slowdown in the global economy is still premature.
Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.