The Overnight Report: Hanging On Jobs

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US markets rose on softer than expected ADP data, with treasury yields moving lower, buoying technology and consumer discretionary stocks.

The ASX200 futures are pointing to a positive start to mark the end of the first week of a typically more 'volatile' September.

Good Morning,

The Australian share market rebounded on Thursday, ending four-days of loses, The ASX200 rose 88pts or 1% to close at 8,825 with nine out of eleven sectors rising, led by Financials up 1.7%. Telcos lagged.

What happened overnight, NAB Markets Research extract

US ADP employment was 54k higher in August, compared to expectations for 68k. The series has a poor track record of aligning with the Bureau Labor Statistics estimate, although to be fair the trend is much more aligned following last month’s revisions. 

Initial jobless claims jumped 8k to 237k, their highest in 11 weeks, still low, but potentially showing a slight uptrend. Meanwhile, continuing claims fell back to 1940k from a downwardly revised 1944k. Continuing claims have moved sideways after shifting higher through May. Hiring plans fell to the weakest level for any August on record in data from outplacement firm Challenger, Gray & Christmas going back to 2009, while intended job cuts rose.

That picture does little to resolve the open question about how much the hiring slowdown is feeding through into spare capacity while labour supply growth has slowed and amid low hiring and low firing. 

It equally does nothing to quieten concerns downside risk to the labour market is building ahead of the much more important August Payrolls number tonight. Consensus for tonight is 75k payrolls growth and for the unemployment to edge to 4.3% from 4.2%. A large minority (31 of 77 forecasters in the BBG survey) pick it will remain at 4.2%, after only just scraping below the 4.25% rounding barrier in July. The rounding barriers might matter for the optics, but the expectation is essentially for no change in the unemployment rate.

Also out overnight was the Services ISM, which improved to 52.0 from 50.1 (consensus 51.0) driven by a sharp rise in new orders to 56.0 from 50.3. The jump in new orders brings the ISM closer to the stronger signal out of the PMIs and suggests growth is at least steadying at the slower first half pace if not showing some reacceleration.

Tempering the improved signal from activity and new orders, the employment subindex remained soft at 46.5 from 46.4 and the backlog of orders index is at a 16-year low, and the ISM’s Chair noted “some indication that business activity and imports are being driven by an attempt to get ahead of additional price increases while preparing for the holiday peak season.”

From FOMC participants, Cleveland’s Hammack (non-voter this year, voter in 2026) repeated she doesn’t see the case for lowering rate this month. “Right now, inflation is still too high, and we’re trending in the wrong direction.” New York’s Williams said that his forecast is that it will “become appropriate” to cut interest rates “over time,” without clarifying timing, with risks to employment moving a little higher and risk to inflation moving a little lower.

The US Justice Department opened a criminal investigation into whether Lisa Cook committed mortgage fraud. Meanwhile, in prepared remarks ahead of his Senate hearing for confirmation, Fed Governor nominee Stephen Miran said, “Independence of monetary policy is a critical element for its success…my opinions and decisions will be based on my analysis of the macroeconomy and what’s best for its long-term stewardship.”

Under questioning he said he would consider returning to his White House job next year after concluding his short stint on the Fed Board.

There are now around -24bp of cuts priced for September and -60bp over the next three meetings, from -57bp a day prior. 2year yields are -3bp lower at 3.59% while the curve flattened a little with 10yr yields 6bp lower to 4.16% and the 2s10s spread narrowing to 57bp. Treasuries led the rally in rates. German 10yr yield were 2bp lower and 10yr gilt yields 3bp lower.

The AUD is 0.4% lower at 0.6517 after touching an intraday low of 0.6502 after the ISM data. 

Equities were stronger, with sentiment supported by lower yields. The S&P500 gained 0.8%, while the Nasdaq was 1.0% higher. Gains were broad-based, with all sectors but utilities in the green in the S&P500, led by consumer discretionary. The Euro Stoxx50 was up 0.4%. In China, the CSI300 closed down -2.1%. 

Bloomberg reported regulators were considering several cooling measures as they grow concerned about the speed of the rally since the start of August.

Chris Weston, Pepperstone extract

In the lead-up to Non-Farm Payrolls (NFP), the various other US labour market releases have certainly failed to raise the probability that hiring will materially surprise to the upside. Instead, expectations remain skewed towards further slowing and broad market positioning is set for a job’s reports that leans on the weaker side of the outcome distribution. 

ADP payrolls came in light at 54k. The ISM manufacturing employment component slowed markedly in August, as did the ISM services employment gauge. We also saw the labour market ‘Differential’ in the CB consumer confidence report shift, with more respondents saying, ‘jobs are harder’ to get than ‘plentiful’. This ratio has historically correlated well with the US unemployment rate, suggesting some upside risk to the consensus of 4.3%.

The reality is that few see these alternate labour market releases as offering any meaningful insights or steer into the NFP report itself, making it difficult to adequately price expectations and risk. 

We know the Fed has placed weight on the NFP outcome, so naturally market players are fixated on it too. This suggests the period around payrolls will be messy from a price action perspective, with algos reacting immediately to the numbers and liquidity thinning out.

How markets ultimately react is tough to plan for. The first move may not be the final move. The clear tactical play is to hold out and put money to work in trades once the collective has had some time to truly digest the data, assess its implications for Fed policy, and consider whether it possibly fuels concerns that the Fed is behind the curve, or even that the labour market is perhaps more resilient than feared. 

US interest rate swaps already price a -25bp Fed cut in September at almost 100%, and -60bp of implied Fed cuts by December, so the bar to cutting is set low. It would take a sufficiently hot jobs outcome, say over 150k, unemployment at 4.2%, and positive revisions, to derail that view and cut the pricing for a September cut to around a 50% probability. 

Alternatively, to see the interest rate swaps market price a premium for a -50bp cut at the 17 Sept FOMC meeting, and bring a -25bp vs. -50bp debate into play, the totality of the report would need to really break down to bring more of the centrists within the Fed’s ranks away from a possible ‘insurance’ -25bp cut, and towards an ’emergency’ styled -50bp cut. 

A print below 50k, with unemployment at 4.4% and further downward revisions, would likely get swaps pricing juiced up, and increasing its sensitivity on next week’s US core CPI print. Naturally, in this scenario, it wouldn’t take long before Trump made his views known on Truth Social and claim Powell and others allowed this to happen and have been far too slow to bring rates down to neutral.

If interest rate swaps were to imply even a 5–15% chance of a -50bp cut, however unlikely a -50bp cut is in reality, the US Treasury curve would aggressively bull steepen. 

US real rates would fall sharply, the USD would likely test and break range lows at 97.65, gold would kick hard and resume its bull trend in earnest, and cyclical equities would be rotated out of in favour of defensive, low-volatility plays.

Bad news would essentially become bad news for risky assets, despite the implied higher rate cut expectations.

Corporate news in Australia

-Atlassian is acquiring The Browser Company, an AI-powered browser, for US$610m to create a browser that would connect applications provided by the company. 

-Mitsui has asked the Federal Court to invalidate $156.3m payment demand from its Bass Strait partner ExxonMobil and a $141.6m demand from incoming operator Woodside Energy ((WDS)).

-Macquarie Group ((MQG)) is winning almost 40% of all new homes loans in July, almost $4 for every $10 in mortgage lending.

-ASIC has raised concerns over decreased competition from Insurance Australia Group’s ((IAG)) proposed $1.4bn takeover over RAC WA.

-KMD Brands ((KMD)) is shutting at least -21 stores as part of a -$25m cost out to improve sales and profits while investing in the digital experience for customers.

-Jack Cowin buys $5m in Domino’s Pizza Enterprises ((DMP)) shares.

On the calendar today:

-JP July earnings

-EZ 2Q GDP

-US Aug NFP

-US Aus Unemployment

-AUSSIE BROADBAND LIMITED ((ABB)) ex-div 2.40c (100%)

-ADRAD HOLDINGS LIMITED ((AHL)) ex-div 2.08c (100%)

-EAGERS AUTOMOTIVE LIMITED ((APE)) ex-div 24.00c (100%)

-CAPRICORN METALS LIMITED ((CMM)) earnings report

-COLES GROUP LIMITED ((COL)) ex-div 32.00c (100%)

-FIREFLY METALS LIMITED ((FFM)) earnings report

-GENERATION DEVELOPMENT GROUP LIMITED ((GDG)) ex-div 1.00c (100%)

-OBJECTIVE CORPORATION LIMITED ((OCL)) ex-div 13.00c

-PACIFIC CURRENT GROUP LIMITED ((PAC)) ex-div 28.00c

-PEET LIMITED ((PPC)) ex-div 5.00c (100%)

-SDI LIMITED ((SDI)) ex-div 1.90c (100%)

-VIVA ENERGY GROUP LIMITED ((VEA)) ex-div 2.83c (100%)

FNArena’s four-weekly calendar: https://fnarena.com/index.php/financial-news/calendar/

The Australian share market over the past thirty days…

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