Published on Monday, the ISM report on activity in the manufacturing sector have given absolutely striking figures. The index for the month of September has reached the level of 60.8 p, which is a historical record since May 2004. Similarly, the index Markit is more modest, and is in correlation relative to the ISM, which shows the index of the index of production. The gap between the Markit and ISM is too important to be ignored and reflects the imperfection or even the means of calculation, rather than the true recovery of the u.s. economy.
The markets reacted to strong data such as the S&P 500 index set yesterday to reach the next historic record of 2534.98 p, in closing the day close to the maximum. The stock market has grown to the extent that the expectations are implemented regarding the prospects of the next tax reform. Moreover, the prospect of the reduction of the tax burden to attract investors, even under the threat of a tightening of financial conditions.The dollar in such a situation will be in high demand, which is certainly a favourable factor.
The employment report for the month of September will be published on Friday. This is a significant increase in the value of wages and salaries. However, the report is expected can be much worse than the previous one. Mainly because of the frequency of hurricanes. Currently, it is expected that the number of new jobs will be reduced by 98 000 while the average of the wage growth is not expected to change to 2.5 percent.
The growth over time, and in the course of time. Here, the role the Federal Reserve plays a role, this directly implies that the consequences of the decisions on the monetary policy.
Market expectations are largely shaped by the position of the Fed. Also, it should be noted that the labor market recovery is becoming a marketing term, since the reality is much worse, which is clearly demonstrated in the graph below. The ratio between the volume of employment (Total non-farm employment) the number of workers who leave the labour market since 2011, is almost invariably and much worse than the pre-crisis period. The labour market gives an image similar to the potentially active population for the number of unemployed is in fact in a much worse state than in the pre-crisis period.
The following statements can be concluded based on the above: there is no real basis to ensure that the high level of employment will contribute to the growth of inflation, according to the rhetoric of the Fed. It just forms the expectations of the market, which expresses itself in the willingness of investors to support the growth of the stock market and generally contributes to strengthening the position of the dollar. However, the long-term position may not clearly justify the stock market. The rate increase in December, as well as the beginning of the Fed’s contraction of the balance sheet, will help tighten financial conditions and increased the deflationary pressure. In these conditions, there will be more demand for the dollar and the currency objectively, to become more expensive.
Today, the ADP report on employment in the private sector for the month of September will be published, and, probably, the number of jobs will have a strong decrease. Taking into account the lower prices, it will cause a market reaction in the case of a significant difference with the forecast. Also, pay attention to the ISM report on business activity in the services sector, the forecast is moderately positive. The result is not worse than expected, which supports the dollar. An important event of the day is a speech from Janet Yellen at a conference in St. Louis, where she is expected to give its assessment on the state of the U.S. economy in light of the planned tax reform.
The reduction in the prices of commodities, mainly oil and gold, as well as expectations of the beginning of the tax reform are pushing investors to move into dollar assets. The market expectations are optimistic and the investors are not inclined to pay attention to the threat of growing deflationary pressure. On the contrary, they suggested that during the rotation of the FOMC members as the President Asset will eventually create a more aggressive form of the team that will apply more stringent measures in monetary policy.
It should not be active until Friday, but the weakening should be considered temporary. Therefore, this can be taken advantage of and enter long positions. In general, the market environment continues to be favorable for the dollar.