Bad News is Good News for Markets – For Now

Market movers today

Today we get the first August CPI releases in the euro area with both Germany and Spain reporting numbers ahead of the Flash Euro CPI tomorrow.

In the US ADP employment for August is due. It may get extra attention after the weak job openings data and consumer confidence yesterday but remember the ADP release is rarely a good guide for the non-farm payrolls due on Friday.

In Scandi, Sweden will release the monthly batch of survey data for consumers and businesses.

Overnight China will release August PMI for both manufacturing and services from NBS.

The 60 second overview

US releases. The US session yesterday saw the release of the monthly JOLTS job opening statistics which showed a sharp decline from 9.2m in June to 8.8m in July. This is a clear indication that demand for labour is beginning to level off and that wage growth pressures are easing with the JOLTS report having many coinciding features with other US labour market compensation measures. Hence the release should be encouraging news for the Federal Reserve as it suggests that the last years’ monetary tightening is beginning to feed through to the labour market. We will get the important non-farm payrolls report on Friday.

In addition, the Conference Board Consumer survey release for August – also released yesterday – showed beginning signs of weakening US consumer sentiment. Consumer expectations declined following some improvement over the summer, while the assessment of job opportunities being ‘plentiful’ fell to the lowest level since April 2021. For the consumer confidence indices there were signs of weakness both in the current situation assessment as well as in the future expectations component – similar to earlier signals from University of Michigan and the PMIs. Inflation expectations in this report ticked ever so slightly higher (5.8%; from 5.7%), although we would be careful reading too much into this amid the summer rise in gasoline prices.

Markets. Overall softer US consumer sentiment combined with signs of declining nominal wage growth eases the pressure on the Federal Reserve to deliver more monetary tightening. Indeed, rates markets reacted sharply to the releases with 2 Y US yields moving more than 10bp lower driving a general bullish steepening of the US yield curve. In turn the drop in yields added relief in financial markets with risky assets across asset classes performing strongly. This shows that we are currently in a “bad news is good news”-regime for markets with investors fretting the potential for additional monetary tightening.

Norway. Also in Norway we got data yesterday on unfilled vacant positions in the job market which showed a drop from 131K to 118K bringing the vacancy rate from 4.1% to 3.7%. The release supports the signals from other recent indicators that the labour market remains tight, but is weakening moderately as growth is slowing down. While not weak enough to stop Norges Bank from delivering another 25bp hike in September, we do believe that a weaker labour market increasingly suggests that the peak in policy rates will be hit next month.

Equities were notably higher on Tuesday as the soft landing narrative was reinforced by new job data. This especially spurred US equities as yields fell, with S&P500 gaining 1.5%, but also Europe rose 1%. Sector performance differed between the two regions. European and Nordic outperformance was driven by value cyclicals, such as Stora Enso and Nokia among the top performers, while big tech led the gains in the US (consumer discretionary, communication and tech all up 2%). Buoyant tones are continuing this morning with Asia and US futures in green.

FI: Global fixed income markets have had a strong performance following the US data releases described above. 2-year US Treasury yields have fallen by a significant 12bp, while the 10-year Treasury yield is down 9bp. The tailwind to US bond markets spilled over to European markets, where 10-year yields fell 5-7bp. The 10-year Italian yield spread to Germany tightened by a few basis points. The market pricing of the expected peak ECB rate was close to unchanged, while the implied probability of further rate hikes from the FOMC subsided a bit.

FX: Yesterday’s FX session was dominated by a boost to risk and cyclically sensitive currencies following the sharp decline in USD yields. Unsurprisingly, the USD had a poor session with EUR/USD moving close to one full big figure higher after having moved below the 1.08 mark earlier in the session. Both NOK and SEK have enjoyed the rally in risk appetite with EUR/NOK and EUR/SEK moving back to the low 11.50s and low 11.80s, respectively. The decline in global yields has contributed to sending USD/JPY a full big figure lower toward the 146 mark while EUR outperformance vis-à-vis GBP has sent EUR/GBP back above the 0.86 mark for the first time in two weeks.

Credit: The red hot primary credit market continued Tuesday with a number of high profile deals announced. In Scandi space this included among others Securitas, Molnlycke, Klaveness Combination Carriers, Eurofins and Sydbank. Once again, the high primary activity took most of the attention leaving the secondary credit market activity subdued. That said, iTraxx Main ended 4bp tighter at 70bp while iTraxx Xover was 18bp tighter at 395.