Yesterday was a great day for risk assets, as markets celebrated better than expected manufacturing numbers out of both the U.S. and China. On the back of an excruciating August for equity markets, it’s hard to tell whether the magnitude of the bounce had more to do with short-term oversold conditions, or if the market is telling us that it has overly discounted the slowdown in global growth that appears to be taking place.
One of the indicators less talked about during the rally yesterday was the ADP employment survey, which declined by 10,000 instead of increasing by the 15,000 that economists expected. We’ve continually written that jobs are very important at this point in the cycle, and that we need to start seeing more robust job creation if the expansion is to extend. Tomorrow we get the monthly payroll report for August. Like last month, the decline in employment of temporary census workers is expected to produce a negative headline number. But the data will be scrutinized excluding census workers, and the current estimate is for an increase of about 40,000 in private payrolls.
Should payrolls surprise to the upside, it would make sense that the markets might rally further. On the other hand, if it is another disappointing report, it wouldn’t be surprising if markets take some of yesterday’s gains right back off the table. But often times market moves have a way of defying commons sense. If it turns out to be a poor number, it will be really interesting to see if the market can shake it off and find a way to rally anyway. If so, we might just be in for a bigger rally. No sense in making any big guesses here, but we’ll be watching closely.