(04 October 2019 ) DAILY MARKET BRIEF 1：NFPs day: will it be the final nail in the coffin?

After a more than disappointing reading in ISM manufacturing last Tuesday (47.8 versus 50 median forecast and 49.1 in August), the non-manufacturing gauge received more attention than ever yesterday as market participants struggle to whether the US economy is heading towards a recession. All economists surveyed by Bloomberg have been caught off guard as the most pessimistic ones expected the non-manufacturing PMI to slide to 53.8 at most, while the gauge actually dropped to 52.6, down from 56.4 in August and well below median forecast of 55. Without surprise, the equity market responded negatively to the news with global indices quickly moving into negative territory. Front month future contracts on the S&P 500 fell as low as 2,855 points, down 1% on the session, while across the Atlantic the EuroSTOXX 50 gave up 0.75% to 3,372. However, both indices trimmed losses within hours, suggesting that market participants are already looking forward to today’s NFPs.

Indeed, a disappointing September job report would heightened fear of a US recession, which would inevitably trigger another equity sell-off and a bond rally. In case of bad news, gold is also expected to extend gains as investors seek shelter. Nonfarm payrolls are expected to come in at 145k, up from 130k in August, while the unemployment rate should have remained stable at 3.7%. In our opinion, there is a strong probability that the payrolls would miss expectations as the market has underestimated the negative effect of the lingering trade conflicts. The trade uncertainty is holding back investment decision, which ultimately translate into slower employment gains. On a more positive note, US and China are set to meet next. This should help investors seeing the glass as half-full even in the case of a disappointing NFP surprise.

By Arnaud Masset