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Investors will be closely watching today's U.S. nonfarm payrolls report, but they will also have one eye out for news on a potentially pivotal meeting between U.S. and Chinese negotiators next week.
What's happening: President Trump downplayed the importance of the meeting on Thursday, telling reporters he has "a lot of options on China. But if they don’t do what we want, we have tremendous power."
Reality check: The U.S. economy continues to grow, but is increasingly struggling to do so. By the day, more economic indicators — from manufacturing to consumer and business sentiment and now the all-important services sector — are turning negative with more industries beginning to follow manufacturing, trade and transportation into outright contractions.
Where it stands: U.S. equities rebounded on Thursday, as traders continued to buy the dip despite data showing growth in the U.S. services sector badly missed expectations.
"Monetary policy is not going to do a damn thing," Baumohl says. "Monetary policy is being held hostage to this trade conflict."
But, but, but: There may be nothing Trump can do to get a meaningful deal with China at this point, as Beijing seems to be participating in negotiations "with the primary intention of staving off further tariff hikes,” Eleanor Olcott, China policy analyst at independent consultancy TS Lombard told the South China Morning Post.
Bullish market analysts and money managers have been somewhat dismissive of deteriorating manufacturing data this year and its importance, arguing that the sector makes up a minute portion of the U.S. economy.
While that is true, manufacturing is a leading indicator and more bearish investors have insisted the sector's decline would drag the rest of the economy down with it.
Threat level: The U.S. services sector, tracked by the ISM non-manufacturing index, clearly has been following manufacturing lower this year, with Thursday's report showing the sector at its weakest in 3 years.
Details: BMO Capital Markets VP of U.S. rates strategy Jon Hill points out that the index's imports component fell into contraction and both the new orders and inventories segments fell notably.
The big picture: "This, when taken with the revised [IHS Markit U.S. PMI] release ... that showed services jobs declining for the first time since 2010, indicates that some cracks in the non-factory component of the economy are beginning to widen," Hill said in a note to clients.
Fed fund futures prices last week showed the market saw about a 50/50 chance the Fed would cut interest rates at this month's policy meeting.
What to watch: A weak reading on today's nonfarm payrolls report will likely send expectations to near 100% for October and above 60% for December.
The U.S. Treasury yield curve is steepening, which typically means investors are growing more confident about the economy. However, analysts say recent moves are actually the result of more fear being priced into the market.
Why it matters: Rather than bets U.S. growth or inflation will pick up, as is the case when the curve sees "bull steepening," action in the Treasury market reflects worry that things could get especially bad in the short term, Tom Essaye, president of Sevens Report Research, tells Axios.
Details: Investors saw fresh cracks in the U.S. economy from both the ISM manufacturing and non-manufacturing reports this week, as well as declines in private payroll growth from ADP and an increase in the number of Americans filing for unemployment benefits amid GM's auto workers strike.
What they're saying: "Earlier this week it was a coin flip on whether or not the Fed was going to cut rates this month or in December, but the ISM and ISM non-mfg changed the odds quite significantly in a short amount of time," DRW Trading market strategist Lou Brien tells Axios in an email.
The big picture: While the Fed has qualified its 2 rate cuts this year as "midcycle adjustments," having to lower rates at its next 2 meetings "would be the Fed’s worst fears coming true," Brien says, signaling a much worse state of play for the U.S. economy.
Of note: The 3-month/10-year yield curve that economists call the best predictor of a recession remains inverted by a wide margin, and 1-month T-bill yields have ticked up to 24 basis points above those on the 10-year.
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