Investors kicked off the last month of the year in a positive mood. Stocks across Asian markets traded in the green on Monday with 10-year US Treasury bonds back above 1.8% and the Yen retreating slightly against the US Dollar.
The risk-on mood was driven by better than expected economic figures out of China. The Caixin/Markit manufacturing Purchasing Manager’s Index rose to 51.8 in November, marking the fastest expansion in activity since December 2016. Meanwhile, the official manufacturing PMI released over the weekend returned to growth for the first time in seven months and crucially above the 50 threshold. Monetary stimulus and declining trade tensions have been major factors in improving the figures, but whether the economy has hit a bottom really still depends on the outcome of US-China trade negotiations. That said, China PMIs lead global PMI by a few months and China drives one-third of global GDP growth so there seems to be some light on the horizon.
US Jobs report
After three interest rate cuts implemented since July in 2019, the Fed signaled it would be on hold. Unless we see further deterioration in economic data, there isn’t a reason to justify another easing move in the near term. Friday’s jobs report is expected to show nonfarm payrolls increased by 180,000 as seasonal hiring picks up and 45,000 GM workers return to their jobs following a long strike. Average earnings are expected to have improved slightly in November and unemployment to remain steady at 3.6%. Barring any surprises, the figures may justify Fed Chair Jerome Powell’s assessment that the economy still has room to continue its current expansion.
Investors will also keep a close eye on ISM data which should receive a lift from optimism around US-China trade deal expectations. Jobs and ISM figures are going to be key components for a December rally in stocks.
Sterling has been stuck in a range of 1.28 – 1.30 as traders struggle to forecast the result of the December 12 election. Traders seem reluctant to make big bets despite the latest YouGov poll showing that the Conservative party is expected to win its biggest majority since 1987. The opposition Labour party is trying to sway voters by driving fears about the future of the National Health Service if the UK strike a trade agreement with the US.
The latest poll from BMG Research showed the Conservative’s lead slipping 2% to 39%, while the Labour party gained 5% to narrow the gap to just a 6-point lead. The mixed poll results are making it difficult to predict the election outcome. However, any signs of the gap narrowing further will be bad news for Sterling bulls.
Central Bank Meetings
The Bank of Canada and the Reserve Bank of Australia are set to announce rate decisions this week. Both are expected to keep interest rates unchanged, but we shouldn’t completely rule out the chances of a rate cut.
Canada has seen its economic growth weakening significantly in the third quarter as global demand has fallen. More surprisingly, jobs unexpectedly declined in October losing 1,800 jobs against expectations of a rise of 15,900. Australia shares a similar story with a weakening labour market and inflation below target. If we don’t see a rate cut this week expect the two central banks to be on the more dovish side.
Oil traders will finally get some questions answered on OPEC policy. Whether we’ll see an extension or deepening of production cuts for 2020 will be known this week. The deal of 1.2 million barrels per day of supply cuts will expire by the end of March 2020. However, global inventories are still expected to rise in the first half of next year due to weak demand and more supply from countries outside of OPEC, in particular, from the US. For prices to move above the recent range of $55 - $65, we will need to see OPEC+ take bolder action, such as further cutting production targets. However, given that the compliance rate is low from some key players such as Russia, it seems getting deeper production cuts will be a difficult task.
Expect oil price volatility to increase this week with risks tilted to the downside. Any outcome, other than stricter compliance or deeper production cuts, is likely to increase selling pressure.