Markets Struggle To Advance In An Unstable Economy

Markets started the week with more of the negative sentiment we’ve grown accustomed to in recent weeks. In Japan and Europe, notably, this later took a turn on market participants attributing a larger likelihood for more QE(s) taking place soon.  On Tuesday, the JPY weakened substantially amid comments made by Etsuro Honda, one of the Japanese Prime Minister’s close advisors, by which Japan needs more economic stimulus to overcome volatility originating from China. These comments were augmented by a weak Japanese preliminary August Industrial Production print, seeing a 0.5% Month over Month contraction, falling below the analyst consensus which expected a 1% expansion, rather. Expectations that the ECB is soon to increase its own monetary easing also grew, on Wednesday, as the European Consumer Price Index dipped to indicate a 0.1% annual contraction in September, after pointing at an expansion, thus far.

The possibility of more stimulus has benefitted global equity markets. Equity indices in Europe opened Wednesday’s session deep within green territory – The Spanish IBEX 35 kicked off the day with a 2% surge, which later moderated to +1.76%. Similarly, the DAX added 2.22% during the day, the CAC 40 increased 2.57% and the FTSE added 2.74%. Naturally, the positive momentum further tricked into U.S markets seeing the S&P500 start the day with approx. a 1.5% gain, later picking up steam to conclude with more than a 2% increase.

March is the new December

Expectations for Friday’s Nonfarm Payrolls stagnated markets toward the end of the week. Evidently, with the Fed proving its reluctance to hike rates it made sense that it wouldn’t take much to clear a rate hike in October and perhaps even December off the table. So, obviously, when the data indicated that just 142K jobs were added to the U.S. economy vs. expectations for 201K and August’s print was revised downwards from 173K to 136K, that had some effect on the expectations for the Fed’s lift-off. Yields in the U.S. sovereign bond market plummeted, reflecting this lowered chance for a rate hike. The probability derived from these yields, that the Fed will hike rates in its upcoming October decision fell from 18% to just 8% and December’s derived likelihood for a hike dropped from 47.5% to just 28.2%.