Pre-NFP housekeeping underway

Asian stocks are bracing for a cautious start despite the buoyant mood that’s been driving global markets. Investors may be feeling optimistic, striding into the new trading month with hopes pinned on a Goldilocks scenario and the Fed’s anticipated rate cuts, but let’s not pop the champagne just yet. China’s ongoing struggles and the looming uncertainty surrounding the U.S. economy—especially with a potential bull trap NFP lying in wait—keep the outlook anything but straightforward. Riding this wave of bullish sentiment might seem like a no-brainer, but the risk of unexpected twists is high, and complacency could be the real pitfall here.

And let’s not get ahead of ourselves—everything is hanging by a thread, or more accurately, by one pivotal jobs report. Wall Street’s finest are rallying around a consensus that the U.S. economy likely added 165,000 jobs in August. That’s the magic number everyone’s eyeing when the nonfarm payroll (NFP) report drops on September 6. The outcome could very well set the tone for the Fed’s first rate cut. Sure, the unemployment rate is expected to edge down to 4.2%, but with a cooling labor market and slowing personal income growth, that headline figure might not be enough to erase the memory of July’s 4.3% uptick. Some even whisper that the peak of the labor market’s glory days might already be behind us.

Take a closer look: the BLS’s preliminary annual benchmark revision suggests that hiring was much slower from April 2023 to March 2024 than initially reported—an average of 174,000, down from 242,000. The JOLTS report’s hiring series recently dipped below levels last seen around the time of the last negative NFP headline, and in the latest NY Fed survey, the share of respondents’ job-hunting hit a decade-high. Meanwhile, the likelihood of becoming unemployed spiked to 4.4%, also a ten-year peak.

The stock market's rally off the August 5th lows has been fueled by economic surprises, with jobless claims and the ISM services survey leading the way. This recent price action suggests that risk assets might continue to dance to the upbeat rhythm of high-frequency growth data, at least for now. If the economic beats keep rolling in, the market could comfortably hover above 5,600 into year-end.

But here's where it gets tricky—the real test is just around the corner: the August jobs report on September 6. A stronger-than-expected payroll number paired with a dip in the unemployment rate could give the market a solid shot of confidence, easing growth fears for the time being. However, another weak report, nudging the unemployment rate higher, could quickly reignite growth anxieties and set the stage for a correction similar to last month’s.

The unexpectedly harsh revision to the payroll data for the 12 months ending in March has only added to the tension, making the upcoming jobs report even more critical.

However, as we’ve seen recently, a 50 basis point cut might not be the market's best friend if it comes alongside signs of labour market weakness. In that scenario, cuts might be seen less as a cushion and more as a desperate attempt to dodge a hard landing. So, a steady stream of 25 basis point cuts could be the sweet spot for equity multiples, provided they’re accompanied by stable growth.

The silver lining? The recent inflation report practically seals the deal that the Fed will start cutting interest rates in September. The only question now is how deep those cuts will go in 2024.

Meanwhile, China continues to play the role of buzzkill in the global Goldilocks scenario. Saturday’s ‘official’ purchasing managers index data delivered a sobering reality check. The world’s second-largest economy is sputtering, with factory activity lagging, deflationary pressures mounting, and the call for stimulus growing louder. Manufacturing hit a six-month low, shrinking for the fourth consecutive month as factory gate prices tumbled and orders dried up.

Sure, the services sector tried to pick up the slack, but growth there is almost invisible. The composite PMI slipped to 50.1—the lowest since China’s grand reopening in December 2022—signalling an economy barely managing a pulse. So, while the U.S. might be strutting its stuff, China has a long way to go before it can join the Goldilocks party.