Stimulus impasse weighs on markets

Having built hopes higher steadily over the past few sessions that the US Republicans and Democrats were edging closer to a new fiscal stimulus package, a sense of Deja vu has swept markets this morning. By my reckoning, the stimulus spread was at USD1.6 trillion/USD2.2 trillion as of yesterday, far apart, but less insurmountable then previous weeks. Sadly, it appears there is no sign that either side is prepared to cross the spread, or even meet in the middle ahead of a soft Thursday deadline US time. That has seen US equity index futures fall this morning in Asia and is wilting sentiment across the region.

Overnight, the US data showed that their recovery remained intact, albeit at a slowing pace, mostly due to the impasses described above. ISM and Market Manufacturing PMI’s and sub-indexes outperformed. Initial and Continuing Jobless Claims both fell again, notably the continuing component, which fell by 1 million. One warning note is that California is not contributing data to these numbers for two weeks, and thus, they could be subject to some sizeable revisions. However, personal consumption expenditure sent a stimulus warning shot across the bows. Personal Income fell a surprising 2.70%, will Personal Expenditure rose, but by a much lower than expected 1.0%. The big surprise was the Core PCE Price Index, which rose by a much higher than expected 1.60%. Inflation anyone? Just kidding, it is a Friday.

The overnight data and stimulus hopes were enough to keep the perpetually bullish FOMO gnomes of Wall Street on track, with equities rising and the US dollar easing slightly. Attention will now turn to this evening’s US Non-Farm Payrolls. With the census worker surge now falling out of the headline numbers, markets are looking for a rise of 850,000 jobs. By the time the next Non-Farm Payrolls is released, the US election will have passed. That means today’s number assumes a greater than usual significance, with a weak number possibly becoming a campaign issue in the absence of a stimulus deal. The same could also be said if the data outperform, with the Republicans using their economic stewardship card to try and close their polling gap. Either way, the data should ensure we have an energetic finish to the week.

With Mainland China, Hong Kong, Taiwan and South Korea all on holiday today, Asian markets were likely to be muted anyway. A light data calendar revealing Japan’s Unemployment ticked higher to 3.0%, with news that the government may be preparing additional stimulus measures falling on deaf ears this morning. Australian Retail Sales fell by 4.0% in August, as the reopening bounce faded. Victoria State and Melbourne’s aggressive Covid-19 lockdown measures are clearly seen in the data as well. Being theoretically temporary in nature, there has been little reaction to the headline figure.

Asia seems content to reduce risk into the week’s end ahead of the US Non-Farm data this evening, with movements in US index futures seemingly driving short-term direction across the region. Markets will be headline-driven and prone to larger than normal spikes due to reduced liquidity across Asia today. The most significant risk factor, and a happy one I am pleased to say, is that the fractious gnomes of Washington DC reach a preliminary agreement on a follow-up US fiscal stimulus package. That would make for a cheery Friday for financial markets and the people of America.

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