Mixed messages from US data leave USD lower and stocks mixed


  • Awful jobs data curbs rapid Wall St. rally

  • Italian FTSE MIB reverses gains as EU triggers EDP against Italy

  • ISM lifts sentiment but USD still lower

  • Pound looks to extend recovery; Service sector data beats


Tuesday saw a face-ripping rally for indices with US stock markets leading the charge higher. A slightly softer tone from Fed chair Powell didn’t harm the advance but if truth be told he wasn’t that dovish and the gains seemed to be more a case of a quick snap back in sentiment after the recent extreme negativity. In fact yesterday was the 2nd best session of the year and there were further gains overnight and this morning as bulls sought to press home their advantage. However, the release of the ADP employment change has caused the market to pull back from its daily highs, with a print of 27k vs 185k exp and 271k prior (revised down from 275k) a clear negative for the US economy. This release is seen by many as a precursor to Friday’s non-farm payrolls (NFPs) and given that today’s release was the lowest since March 2010 it clearly does not bode well.


The European Union decided to trigger a so-called excessive debt procedure against Italy due to a high level of indebtedness. This is the first time the EU has launched such a procedure against an EU member. The European Commission expects the Italian debt-to-GDP ratio to rise in both 2019 and 2020 to over 135% on the back of a debt-increasing “snowball” effect, a declining primary surplus and adverse demographic trends. These factors are expected to partly reverse the positive effects of past pension reforms and, as a result, weaken the country’s long-term fiscal sustainability. The EC also said that “low productivity growth keeps constraining Italy's growth potential and hampering a faster reduction of the public debt-to-GDP ratio.”In response to the decision the Italy/Germany 10Y yield spread has jumped several basis points and it is trading at 2.82% at the time of writing. The euro has barely reacted while the Italian FTSE MIB (ITA40) has begun reversing its previous gains. It is worth noting that the index is bouncing off the crucial technical supply zone. The more notable support can be localized nearby 19600 points, the level is also supported by the 50% of the latest upward move.


ISM non-manufacturing index unexpectedly jumped to 56.9 points in May from 55.5 points in April. The moves is surprising as the PMI (Markit version of the index) slid to as low as 50.9 points. The ISM thus suggests that the major sector of the US economy still does fairly well – good news amid a generally deteriorating picture. Earlier today the ADP report showed the weakest employment growth in the private sector since March’10 at just 27k. The ADP is less volatile than the NFP report (it will be published this Friday) so the decline may be a concern for investors and the Fed alike. Lower interest rates would be generally positive for stocks but weak macro picture may fuel slowdown concerns and the single ISM print (keep in mind that manufacturing ISM tumbled in May) is not enough to soothe these fears. The mixed messages from the ADP and ISM have caused a bit of indecision for the buck, but on balance the US dollar is trading slightly lower on the European close. 


The latest look at the UK service sector has provided some slightly better than expected news with a PMI reading of 51.0 just topping consensus forecasts. The data for April represents the second beat so far this year and more importantly is signals another month of expansion, albeit at a subdued pace. After the March reading fell below 50 there was a growing concern that the most important of the 3 sector surveys would signal further contraction but it seems to be just about holding up ok for the time being. This is far from a picture of real strength and while a modest increase in business activity and new work rising for the first time this year, all the signs continue to point to the UK economy being close to stagnation. The pound has moved back up near its highest level of the day after the release and is back above the $1.27 handle as it looks to recover from the recent declines.


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