Relief rally already struggling

Equity markets have erased early gains to trade in the red on Thursday, as investors take a cautious approach ahead of Friday’s jobs report.

The narrative in recent days of weaker data being positive as it could be a precursor to slower tightening didn’t seem sustainable and it’s already proving to be the case. I think it was more a reflection of the steep sell-off in the markets and the performance of risk assets in general over the six weeks previous, rather than the data. If the Fed wasn’t prepared to jump at the first sign of inflation easing, it certainly won’t on the back of a weaker PMI and decline in job openings.

The recovery did provide some temporary relief and while weaker data is likely to precede a deceleration in rate hikes, I don’t think we’re there yet. Yesterday’s services PMI – which is far more important – was still strong, as was the ADP number and tomorrow’s jobs report is expected to remain hot.

That may put an end to the narrative for now, although any weakness in the labour market data tomorrow, or signs of additional slack, could boost the relief rally once more and see equity markets end the week strong. As I say, it’s all clutching at straws at this point but after weeks of heavy losses, perhaps that’s not overly surprising.

UK facing major headwinds

The UK economy appeared to get some good news from the Construction PMI this morning, which easily beat expectations rising to 52.3 rather than dropping to 48.1 from 49.2. So rather than contracting at a faster rate, the industry posted strong growth in the survey. Unfortunately, the headline number simply doesn’t tell the full story. The improvement was driven by delayed projects and easing supply shortages, while new orders showed the weakest growth since May 2020. That’s a more accurate reflection of the state of play in the UK right now.

As was captured overnight by Fitch downgrading the outlook from stable to negative in light of the mini-budget. The overall rating remained at AA- but that may change once the details of how everything will be paid for are released in the budget. Sterling is down for a second day after recovering over the last week, off around 0.6% against the dollar.

Choppy ahead of the jobs report

Bitcoin continues to be choppy around $20,000, with trade in the middle of the week having lost the momentum it started with. Traders appear to have one eye on the jobs report now in the hope it’s bad enough to trigger another risk rally. Given the strength of the labour market until now, they may be disappointed once more.

For a look at all of today’s economic events, check out our economic calendar: www.marketpulse.com/economic-events/

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