[Good Morning Market] Ahead of US Employment Report Release... Risk Asset Preference vs Tapering Necessity

Employment Indicators Expected to Improve
Both ISM Manufacturing and Services Indices Fall Short of Consensus

[Image source=Yonhap News]

[Asia Economy Reporter Byungseon Gong] On the eve of the April employment report release, the U.S. stock market showed an upward trend. The focus is on whether the improvement in employment indicators will trigger a preference for risk assets or whether risk asset avoidance will occur due to the possibility of early discussions on asset purchase tapering.

On the 6th (local time), the Dow Jones Industrial Average closed at 34,548.53, up 0.93% (318.19 points) from the previous trading day. The Dow index set a new all-time high for the second consecutive day. The S&P 500 index closed at 4,201.62, up 0.82% (34.03 points) from the previous day. The Nasdaq index rose 0.37% (50.41 points) to 13,632.84. The Nasdaq, which had been declining recently, turned upward after five trading days.

◆ Sangyoung Seo, Researcher at Mirae Asset Securities = The market is focusing on the April employment report to be released on the 7th. Nonfarm payrolls are expected to exceed last month's 916,000 to reach 938,000 or even surpass 1 million. The unemployment rate is also expected to improve from last month's 6.0% to 5.8%.

The U.S. stock market remained cautious awaiting the employment report results, with selling pressure centered on thematic stocks such as solar power, cannabis, and electric vehicles. Buying demand strengthened mainly in financial and consumer-related sectors. Additionally, just before the market close, there was a rebound buying centered on large technology stocks that had been weak.

As employment improvement continues, attention is on whether this will stimulate economic normalization and spread risk asset preference, or whether the Federal Reserve's concerns about employment instability easing will trigger early tapering discussions and cause risk asset avoidance.

Robert Kaplan, President of the Dallas Federal Reserve Bank, known for his hawkish stance, said, "The Fed should start discussing tapering sooner rather than later," adding, "The Fed's policy does not need to be preemptive, but it also does not want to be delayed." Although Kaplan does not have voting rights, it indicates that the number of members wanting to start tapering discussions is increasing.

ISM Headline Index (Source=Yuanta Securities)

◆ Byunghyun Jo, Researcher at Yuanta Securities = Attention should be paid to the recently released April ISM manufacturing and service indices in the U.S. The manufacturing index recorded 60.7 points, down 6.2% from 64.7 points the previous month. The service index, although relatively better, fell 1.6% to 62.7 points compared to the previous month.

There are several points to note regarding the movement of the ISM indices. First, both indicators fell short of market consensus and declined compared to the previous month. It is difficult to interpret the slowdown in upward momentum positively, given that the levels are in the empirically high range. Second, among the sub-indicators, while the upward momentum of new orders and production is slowing, price indicators continue to rise sharply. Third, the service index shows a relatively robust trend, indicating that the macro momentum is weighted toward U.S. domestic consumption and the service sector.

Currently, the weight of U.S. economic momentum leans toward the service sector. This is worth connecting with the Conference Board's consumer sentiment index released at the end of last month. The headline consumer sentiment index recorded 121.7 points last month, showing a significant surprise. However, the details are ambiguous. The current conditions index increased by nearly 27% compared to the previous month, while the expectations index, which reflects about six months ahead, barely changed from 109.6 to 109.8 points. In other words, the sharp rise in the headline is largely due to the surge in the current conditions index, which may reflect short-term optimism stimulated by recent policy announcements.