Equity markets are getting pounded as investors fear the prospect of an earlier than expected rate tightening programme being enacted by the Fed. The FOMC statement on Wednesday suggested that the committee would be focusing on lacklustre wage growth as a reason not to tighten too soon. However yesterday’s increase in the Employment Cost Index gave a suggestion that wages could be about to increase. This will then put big focus on today’s Non-farm Payrolls report. Not necessarily because of the headline jobs growth (everyone is expecting a 6th straight month above 200,000) but more the emphasis is on the growth of average hourly earnings. The forecast is for 0.2% and if this number is seen stronger then this would be a significantly hawkish signal and could mean further concerns about tightening and investor fears exacerbating.
The DAX, CAC 40 and FTSE 100 are all under severe pressure moving into the Payrolls report, and this is something of a rarity. Usually markets will consolidate in front of the key figure, but clearly traders already think they know that here will be hawkish signals in the report. The S&P 500 futures are already suggesting the index will over over 0.5% lower but this could change significantly after the report.
The jump in the VIX Index of S&P 500 options volatility to almost 17 suggests that investors are increasingly concerned and require protection for their portfolios. This could filter through to further losses on indices.
Interestingly though, forex markets are mixed today, with the euro finding support whilst sterling is under continued selling pressure. The UK manufacturing PMI significantly disappointed and this has been bad timing for sterling as it comes at a time at which the US dollar is being given hawkish signals. The momentum of the selling pressure on Cable now is having a profound impact on the longer term outlook and even if a technical rally sets in from here, the ability for the sterling bulls to properly regain control is seriously under question. This is being driven by changing expectations on the rate tightening schedules of both central banks. Whilst the Fed is seen as being driven forward in its timetable, the Bank of England is being put back. Much of what has driven Cable higher over the past few months has come as the UK economic data has been strong. Question marks are now being placed over this outlook.
As for the Euro it is almost as if perhaps the near to medium term selling pressure may be close to running its course. The dip in Eurozone HICP inflation to 0.4% and now a slight decline in the manufacturing PMI today has had little impact on the euro which is currently trading close to the day high against the dollar. It will be interesting this afternoon with Non-farm Payrolls as unless there is a move to sell the euro (on the back of increasingly hawkish signals) it could be a signal that much is now baked into the price (at least in the time being). Technically, the RSI hit 23 (sub 30 begins to get oversold) and is beginning to try to unwind. I am becoming increasingly interested in the prospect of a rally now. Holding above Wednesday’s low at $1.3655 could be interesting, whilst a move above the reaction high at $1.3405 and near term resistance at $1.3420 could be a trigger for a recovery. Watch this space.