Nasdaq rallies on weaker economic data

Stocks firmed this morning, led by the tech major and Nasdaq, on the belief that today's weak economic data will open the door for a pause in interest rate hikes by the Federal Reserve, notably Friday’s Non Farm Payroll. Markets remain obsessed with the path of inflation and interest rates, seeing bad news as bad for bonds and the dollar but good for equities. The trade is now focused on tomorrow's personal income data, including will Personal Consumer Expenditure (PCE) data, in which core inflation is forecast to be 4.2%.

Bottom-line: risk-on.

TODAY’S MAJOR NEWS

Weaker ADP employment report

• Today’s ADP employment report indicated that the private sector created 177,00 jobs in August, less than the expected 200,000, and down from 371,00 in July
• The correlation between the ADP report and the government’s monthly jobs report due out on Friday isn’t always the best, but this morning’s numbers provided more fodder to the doves looking for weak Non Farm Payroll and a pivot by the Federal Reserve

Q2 GDP revised down

• The second read on gross domestic product revealed that the economy grew at an annualized rate of 2.1% in the second quarter, below the first reading of 2.4% which analysts thought wouldn’t change
• Personal expenditures grew at an annualized rate of 1.7% in the second quarter, up from 1.6% in the first reading, matching analyst expectations but still weaker than previous trends

Investor confidence surges

• The State Street Investor confidence index surged 11.4 points in August to 107.7, its largest monthly increase in 18 months. The index measures investor confidence by monitoring the flow of money both in and out of the equity markets
• The index increased in all three global regions: the North American index rose by 12.9 points to 103.8; the Asian index rose 4.8 points to 102.2; and the European index rose 4.3 points to 103.7

Pending home sales rose in July, but are still depressed

• The pending home sales index rose 0.9% in July to 77.6, above the 0.4% expected, and following 0.4% gains in June
• Pending home sales were still down 14% year-on-year

China’s stimulus efforts moving slowly

• Stocks pulled back in China overnight as traders took profits on recent gains amid re-emerging concerns about the economy, with foreign investment seen at a net outflow for the session
• China could lower interest rates, but at the same time wants the world to see the yuan as a strong alternative to the US dollar as the world’s currency of trade, particularly as it supports expansion of the BRICS coalition of nations
• China’s Central Bank issue guidance this month for a possible reduction in home mortgages rates, likely be accompanied by a cut in savings rates to support bank balance sheets while also encouraging more consumer spending versus saving

Oil prices buoyed by Gulf platform hurricane shutdowns and lower inventories

• Crude oil prices found support from platform shutdowns in the Gulf of Mexico due to Hurricane Idalia, along with the continued shrinkage of US inventories
• Commercial crude oil inventories fell by another 10.6 million barrels in the week ending August 25, continuing the trend of rapid depletion of supplies that we've seen this month
• Total stocks, minus the Strategic Petroleum Reserve, are now at 422.9 million barrels, down 3% from the five-year average for late August
• Crude oil imports are increasing, with the four-week average at 6.8 million barrels per day, up by more than 12% from the previous year's pace
• Gasoline stocks fell by 0.2 million barrels, putting them 5% below seasonal levels
• Distillate stocks rose by 1.2 million barrels last week, but they remain 15% below levels typically seen at this time of year

Gold tracks the dollar and US economic data

• Gold is showing some signs of life, now back to $1,972 per ounce, having dipped under $1,900 per ounce in mid-August
• Recent strength was based largely on weaker than expected US employment data, weakening consumer confidence and slowing first quarter US GDP
• Anticipation that official rates have peaked, given slowing activity, is the basis for recent precious metals strength
• Investor activity has been mixed, but potentially points to fresh price gains for gold and silver

TODAY’S MAJOR MARKETS

Equity market rally continues

• Equity markets continued this week’s rally with the Nasdaq and Russell 2000 up 0.4%, while the S&P 500 was up 03%
• Global markets were generally stronger overnight, with the FTSE 100 and Nikkei 225 up 0.1% and 0.3% respectively, while the DAX fell 0.2%
• The VIX, Wall Street’s fear index, fell back to 15.3

Bonds and dollar rallies

• Bond yields fell back, with 2- and 10-year bonds falling to 4.86% and 4.10% respectively
• The dollar index fell 0.2% to 103.2
• The Euro and Sterling rose 0.4% and 0.6% respectively, with the Yen down 0.2%  versus the dollar

Oil and Gold rallies

• Crude oil prices rose 0.3%, to $81.4 per barrel
• Gold rallied, up 0.9% at $1,972 per ounce, while Silver fell 0.5% to $24.7 per ounce
• Grain and oilseed markets are mostly lower, with widespread profit taking and spread unwinding
• Traders continue to hear anecdotal reports of crop deterioration from the current Midwest weather pattern, but they lack data to suggest that the deterioration is worse than what has already been priced into the market

Analysis by Arlan Suderman, Chief Commodities Economist: Arlan.Suderman@StoneX.com 

Market outlook by Paul Walton, Financial Writer: Paul.Walton@StoneX.com