Last week Friday was an important day for global markets. After US markets closed early on Wednesday and were closed the whole of Thursday due to Independence Day, all eyes were on the employment data to be released on Friday afternoon.
Global markets pushed higher the whole of last week, with the US reaching record highs yet again (see below chart). The optimism stemmed from the increasing certainty among investors that the US Fed will cut interest rates aggressively by as much as 0.50%. The expected rate cut would be in response to increasingly weak economic data and concerns regarding US economic growth. So, you had the unusual situation of weak economic data pushing markets higher – seems a bit counter-intuitive doesn’t it.
Friday morning started with extremely low factory numbers in Germany for May, worse than expected. This did not affect the DAX futures much as it was still in-line with the above narrative and further strengthened the case for rate cuts. The main figure investors were keeping their eye on were the US non-farm payrolls (the change in number of people employed excluding the farming industry) for June. After dismal figures for May (only 72’000 jobs added), expectations were for an increase but still for the figure to be low compared to previous months. To everybody’s surprise, the figure was much better than expected (224’000 jobs added) and put a bit of a dampener on the hopes for a rate cut in the immediate future. US futures fell sharply after the release, but had gained back most of the losses by close on Friday.
What does this mean for markets? The US finds itself in a unique situation where investors are actually hoping for weak economic data to serve as the reason for having to cut rates in order to sustain the US economic expansion. The global economy is showing signs of slowing down, as well as certain parts of the US economy. But there are areas of the US economy that are proving resilient with unemployment levels at historical lows. The US-China trade war remains a bit of an unknown with an announcement, good or bad, always around the corner which can move markets significantly either way.
The better-than-expected jobs report in all likelihood just delayed when the Fed will cut rates, and how aggressively they will cut when they do. The Fed has stated their willingness to support the US economic expansion and their flexibility regarding policy – this is the overriding principle I always seem to come back to when wondering where markets are heading.
Stephan is a portfolio manager and full-time trader. He developed his passion for the markets while working in the Stockbroking division of Standard Bank and is especially passionate about CFD trading. Stephan studied at the University of Stellenbosch and completed a BComm Honours (Business Management) with a focus in Portfolio Management and Bonds. He has also passed the JSE Equity Trader’s Exam, RE5 (Representative) and RE1 (Key individual) Exams as well as the Registered Persons Exams (RPEs) in order to give advice on equities.