The market appears to be stabilizing with a positive outlook. Yesterday marked the second consecutive day of recovery, bolstered by a reduction in bond Internal Rates of Return (IRRs)—the German Bund fell to 2.37% and the US T-Note to 4.43%. This decline in yields has provided some breathing room for equity markets, assuming no new disruptions occur.
Yesterday's US ADP Private Employment Survey exceeded expectations, reporting 183k new jobs compared to the forecasted 150k, with previous records revised upward. Typically, strong employment data could negatively impact Wall Street, as it signals potential inflationary pressures. However, the market's focus quickly shifted to the US ISM Services report, which indicated a decline in the Prices Paid component from 64.4 to 60.4, suggesting lower inflationary pressures. This news overshadowed the employment data, allowing the T-Note IRR to drop significantly from 4.50% to nearly 4.40%.
Today, several key events could reinforce this positive trend and potentially lead to a third consecutive day of gains. Early corporate results are mixed, with disappointing reports from ING and Ford, and weak guidance from Qualcomm. However, positive macroeconomic data could provide support. German Industrial Orders showed an unexpectedly strong increase (+6.9% vs. +2.0% expected), and EMU Retail Sales are anticipated to be robust (+1.9% vs. +1.2% expected). Additionally, the Bank of England is expected to lower rates by 25 basis points to 4.50%, which, although anticipated, will provide confirmation and further support.
The afternoon brings some uncertainty with US macroeconomic data. Weekly Unemployment claims are expected to rise slightly to 213k, which could be seen as favorable for equity markets. However, this will be accompanied by a weak 4Q Productivity report (+1.4% vs. +2.2%) and rising Unit Labour Costs (+3.4% vs. +0.8%). The latter could introduce concerns about US inflation, which has been stubbornly high.
Given that today could mark the third consecutive day of gains driven by short-term factors, some fatigue or reversal is possible, especially ahead of tomorrow's formal US employment data release for January. While the market may see a slight boost, caution is warranted. It's reasonable to expect bond yields to rise slightly as a natural counter-reaction to their recent decline. Overall, equity markets are relatively flat for the week, which is a satisfactory outcome given the circumstances.
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