Asian stock markets are narrowly mixed

September 2, 2016

European Outlook: Asian stock markets are narrowly mixed, (Nikkei closed flat at 16, 925) U.S. stock futures little changed and U.K. futures slightly higher. Oil prices meanwhile have lifted off lows, but remain firmly below USD 44 per barrel having traded to $43.02 yesterday. Investors are looking ahead to key U.S. jobs data during the European afternoon session, which are hoped to shed some light on the timing of a possible rate hike, although our forecast for a 185k headline increase (median (189k), close to the 3-month average of 190k, might not make a clear case for a September rate hike. The European calendar has Eurozone PPI data for July, as well as the U.K. August Construction PPI, Spanish unemployment numbers and the final reading of Italian Q2 GDP.

US Data Reports: The U.S. ISM drop to a 7-month low of 49.4 from 52.6 in July and a 16-month high of 53.2 in June reversed much of the 8-month climb from the 48.0 expansion-low in December. The ISM sits well below the 59.9 cycle-high in February of 2011, as all the sentiment measures have remained depressed since the oil price plunge starting in Q3 of 2014. U.S. Markit manufacturing PMI slipped to 52.0 in the final August reading, versus July’s 52.9, and from the August preliminary print of 52.1. It was at 53.0 a year ago. New orders declined to 52.7 from July’s 54.2, reflecting a slower pace of growth. That led to a weaker pace of hiring, and resulted in a drop in employment to the lowest level since April.

Fedspeak: Cleveland Fed hawk Lorretta Mester said the low level of rates is not an effective solution to problems in the labor market, noting that she didn’t share the convictions of protestors at Jackson Hole last week who lobbied for the Fed to resolve racial income and employment gaps through extending low rate policy. She views these as “longer-run issues.” Otherwise, she made no other references to policy timing. She also said the US is basically at full employment and the case for gradual rate increases is pretty compelling, though the Fed is not behind the curve. She also supports including “confidence bands” around the Fed’s forecasts. Note she is a voter this year and there is nothing particularly new or changed in her view.

Waiting for Draghi: The summer is coming to an end and the ECB will have the questionable honour of kicking off this month’s round of central bank meetings. For Draghi the key question is whether the mixed data releases and the still low inflation numbers justify further action or mainly mean that the ECB won’t follow the Fed in its path to a policy normalisation. Unfortunately, the impact of currency moves on the growth and inflation outlook, which in turn also hinge on central bank decisions both in the U.S. and the U.K. will make it difficult for Draghi, who won’t have the benefit of hindsight and has to make his bid ahead of Yellen and Carney.

Main Macro Events Today        

UK Construction PMI – 08:30 GMT – Forecast for a slight rise to 46.6 from 45.9.

US NonFarm Payrolls – 12:30 GMT – Bloomberg, CNBC, and Thomson Reuters Surveys have a consensus for180k news jobs – There are very wide estimates this month ranging from +125k from PNC Financial to +255k from Societe Generale. The Unemployment Rate is expected to fall to 4.8% and the Average Hourly Earnings is also expected to fall to 0.2% from 0.3%.

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