After a torrid morning session, US blue chips managed to close with a triple-digit rally on Thursday as investors chose to focus on the ‘bad news is good news’ scenario following another grim batch of economic data.

By New York’s close, the Dow Jones Industrials Average was 122.42 points, or 0.5% higher at 26,201.04, just off the session peak of 26,205.20 and well above the day’s low of 25,743.46.

The broader S&P 500 index and tech-laden Nasdaq Composite also both whipsawed on Thursday having earlier dropped by around 0.8%, closing 0.8% and 1.1% higher, respectively.

In the first hour of trade in New York, the Dow Jones had tumbled by over 300 points to bring up the 1,000 point intra-day deficit mark for the first three sessions of October as recession concerns were heightened by weak services sector data.

READ: Fears over US growth and trade war escalations see investors endure a shocker of a start to October

The US Institute for Supply Management said its non-manufacturing index fell to 52.6 last month from 56.4 in August, well below forecasts for a reading of 55.3%.

The weak services sector survey added to the pressure on Wall Street after the ISM’s manufacturing index, released on Tuesday, showed activity in the US factory sector fell to a 10-year low in September.

Adding to the market chaos was news on Wednesday that the World Trade Organization had backed a US request to impose tariffs on US$7.5 billion of European goods due to the EU subsidies which were previously handed to aircraft manufacturer Airbus, sparking yet another escalation in President Trump’s ongoing trade wars.

But the mood then swung to the positive as investors chose to focus on expectations that the signs of weakness across all areas of the US economy may prompt the Federal Reserve to lower interest rates once again at its next meeting in late October following two back-to-back quarter percentage point cuts in August and September, which were the first easings in monetary policy by the Fed in over a decade.

The CME’s Fedwatch indicator now puts the chance of an interest rate cut by the Fed at its late October meeting at 90.3%, up from 77% on Wednesday and 49% a week ago.

Non-farm payrolls crucial

Much will depend on the closely watched US monthly non-farm payrolls (NFP) data, due just after the market open on Friday, especially after a private sector employment survey from ADP on Wednesday proved disappointing.

Consensus expectations are for the US to have added 147,000 new jobs in September, higher than the preliminary 130,000 gain recorded in August.

In a note to clients, analysts at ING commented: “Payrolls growth has been slowing over the past year. Initially, there was a sense that this was because firms were struggling to fill vacancies due to a lack of workers with the right skill sets. However, the downturn in business activity suggests that it is increasingly becoming a labour demand story. As such the recent pick-up in wage growth may not continue for much longer, which risks undermining consumer spending.”

They added: “Given these fears, we cut our US GDP growth forecast for 2020 to 1.3% a couple of months ago. The consensus is still 1.8%, but we imagine that this will be moving lower.

“The latest developments should add a sense of urgency to talks seeking a resolution to the US-China trade dispute and will keep the pressure on the Fed to ease monetary policy further. We continue to look for a December rate cut and a further move in 1Q20, but the risks are increasingly skewed towards more aggressive action.”

Contact the author at jon.hopkins@proactiveinvestors.com