(Reuters) - Was the Fed justified in cutting rates a third time this year when stock markets are at record highs and U.S. and world growth rates, while slowing, by no means appear headed towards recession?
And more importantly, will it need to do more? Markets seem to reckon it will, with the dollar trading near a three-week low against the yen and a one-week low versus a currency basket, while U.S. Treasury yields have slipped around 15 bps from the six-week highs hit at the end of last month.
Weak Chicago PMI released yesterday hasn’t done anything to dampen that view and expectations are that the all-important non-farm payrolls today will show a slowdown in job creation – forecasts are for 86k new jobs versus September's 136k.
Wall Street closed a touch lower, coming off record highs on Thursday too as conflicting reports on a possible trade deal between the U.S. and China eclipsed strong earnings from tech titans Apple and Facebook.
Indeed, caution has crept in since Bloomberg reported Chinese officials doubt a comprehensive trade deal can be reached. And this morning, PMI data across Asia has been mostly sobering, with Japan’s sinking to a three-year-low while South Korea, Taiwan, Malaysia and Indonesia also fell – mostly due to the slump in export orders.
Still, the mood is a bit more cheerful, pinned to PMI data showing Chinese factory activity expanded at its fastest pace in more than two years in October as export orders and production rose – that contrasted with the dour results of a Thursday survey and boosted Chinese blue chips 1.7%, their biggest one-day rise since August.
U.S. futures are firmer too, European shares are opening higher and world stocks are not far off 21-month highs. In fact October was the best month for the MSCI world index since June, and Deutsche Bank point out that year-to-date there isn't a single asset in their sample with a negative total return – the first time in 13 years that this has happened in the first 10 months of a year.
Later today, aside from payrolls, markets will look to more PMIs across Europe and the UK, while in the euro zone, today is when new ECB President Christine Lagarde takes office and the ECB resumes its QE programme.
The new tiered rate system was also introduced this week and today we have seen the first fixing for (new money market rate) ESTR under the tiering setup. So far so good, say banks, noting ESTR was steady, meaning there’s no upward pressure so far on short-end rates.
Keep a watch today on some prominent emerging market troublespots – Lebanese banks opened their doors to customers for the first time in two weeks, pressure on the FX peg is now intense and will hinge largely on what kind of damage ensues to deposit flows stemming from that protracted closure. Debt yields and CDS have eased a touch since PM Hariri said he would resign, but there’s very little visibility on what happens next in the wider political crisis.
In Turkey, PMIs signalled a return to manufacturing recession in October – the lira has inched lower. Later today, Fitch reviews its credit rating while Moody’s will assess South Africa which has been embroiled in fresh budget and Eskom fracas.
European bourses are opening slightly higher following the positive data from China and ahead of the NFPs. Asian shares reversed early losses as an unexpected bounce in Chinese manufacturing activity offset some negativity cast by yesterday’s reports that Chinese officials doubt a trade deal with U.S. President Donald Trump is possible.
There's a pause in the Q3 earnings season so it's likely to be calm on the European corporate front. Among the few trading updates this morning, Danske Bank narrowed down its full-year profit outlook, drugmaker Novo Nordisk reported operating profit slightly below forecast, and O2 Czech Republic's profit decline slowed in the third quarter.
One big mover will be British car dealership Lookers which is down 21% after it said this morning it expects profit to fall by more than two-thirds as the UK car market faces dwindling consumer confidence and margin pressures. In M&A news, Lufthansa is said to be ready to invest up to 200 million euros in an Alitalia rescue.
In emerging markets, a fourth week of gains for the MSCI stocks index and a fifth straight week of gains for the EM currency index.
Lebanese banks opened to customers on Friday for the first time in two weeks, following a wave of protests that led the prime minister to resign. No formal capital controls in Lebanon, but banking sources said on Thursday that commercial banks would try to restrict transfers abroad to cases such as loan payments, medical expenses and family support.
South Africa is waiting on a crucial Moody’s rating review after the horror of the government mid-term plan - it’s the worst week for South Africa’s rand since early August at -2.7%. Also a third straight week of gains for the Turkish lira vs dollar – Fitch reviews Turkey rating.
First weekly drop for Mexico’s peso in five weeks. Fifth straight week of gains for Korean won. And Argentina’s blue chip swap rate - the spread between locally-listed and foreign-listed shares - is hanging around 30%.
— A look at the day ahead from EMEA Deputy Markets Editor Sujata Rao. The views expressed are her own —