The new trading week and month started with a risk-on tone, as stocks bounced from their lows. The reason? Worse-than-expected US economic data.
As ironic as it may sound, poor economic data is bullish for US stocks. The explanation comes from traders’ expectations that the Fed will finally pivot and end the aggressive tightening.
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The current tightening cycle is one of the most aggressive in the history of the Fed. As a result, it led to a stronger dollar across the FX dashboard and to stock market weakness.
Manufacturing PMI at 50.9%
The September Manufacturing PMI came at 50.9%. While still above the 50% level, the manufacturing economic breakeven line, it missed market expectations.
It suggests a slowdown in the sector’s growth. Three subindexes were in growth territory – production, supplier deliveries, and inventories, but new orders, employment, and new export orders contracted faster.
The employment component within the sector is contracting
One reason for the bounce in the US stock market and the decline in the US dollar is given by the possibility that the Fed pivot is coming closer. But there is one other to consider, as this week is the NFP week.
That is, all eyes are on the job data. A strong job market made it easier for the Fed to stay on track with its tightening cycle.
However, a softening job market signals a pivot earlier than initially thought. The first sign came today, as the employment component in the manufacturing sector fell to 48.7% in September, from 54.2% in August.
It suggests that Friday’s NFP data may also miss expectations, and stocks should extend their rally while the US dollar’s weakness should persist.
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