The Market Today
ADP Projects September Rebound in Labor Recovery
by Craig Dismuke, Dudley Carter
4Q ECONOMIC OUTLOOK WEBINAR – Thursday October 7, 2021 at 10:00 a.m. CT (Register Here)
Vining Sparks will host our 4Q Economic Outlook Webinar tomorrow morning. The Delta wave has had a muted impact on economic activity relative to the first two waves. However, imbalances have formed across multiple aspects of the U.S. economy. One outworking of these imbalances has been the sharp, and surprising, rise in inflation. We will dig into the details of these issues during our presentation, along with how we expect these issues to affect future interest rates.
TODAY’S ECONOMIC DATA
ADP Projects September Rebound in Private Sector Labor Recovery: The economy added 568k private sector jobs in September, according to the preliminary report from ADP. August’s disappointing 374k was revised lower to 340k. The September data showed 102k good-producing jobs recovered and 466k service sector jobs. The construction and manufacturing sectors were quite strong, nearly doubling their 12-month trend recovery rate. Also encouraging, the leisure and hospitality sector added 226k private payrolls, up from 155k in August. The sector was particularly weak in August, according to the BLS report, having added no jobs. Heading into Friday’s BLS nonfarm payroll report, the leading indicators point to an encouraging rate of job recovery. Our in-house labor-indicator tracker points to payroll growth near 700k, although the Bloomberg consensus of economists projects 488k.
Mortgage Rates Rise, Push Applications Lower: Mortgage applications for the week ending October 1 fell 6.9% WoW. The average 30-year mortgage rate rose 4 bps to 3.14%, now up 11 bps in the last two weekly reports. Purchase apps 1.7% WoW while refis were hit harder, down 9.6% WoW. Purchase apps are now down 19% from their January average while refis have dropped 33%.
Debt Ceiling Drama: The Senate is expected to vote once again on suspending the debt limit today. Treasury Secretary Yellen indicated that she does not support Treasury printing a $1 trillion coin.
YESTERDAY’S ECONOMIC NEWS
Services ISM Picks Up Unexpectedly, Though Supply Headwinds Persist: There was mixed news in a couple of September reports tracking activity across U.S. services industries. The ISM’s Services PMI recovered unexpectedly from an August drop, inching up 0.2 to 61.9, a solid level historically but below stronger readings from earlier this year. The business activity index rose 2.2 to 62.3 and accounted for most of the gain, indicating demand has held up amid the Delta wave. The new orders index rose 0.3 to 63.5 while declines in employment, down 0.7 to 53.0, and supplier deliveries, down 0.8 to 68.8, served as offsets. Fewer supplier delays and a third monthly improvement in inventory sentiment from record-worst levels signaled some supply-side relief. However, prices paid and orders backlogs increased after sharp drops in August and the comments section was replete with remarks about struggles sourcing products and clogged logistic networks causing long lead times. Separately, the Markit Services PMI for September was revised up from an initial estimate of 54.4 to 54.9, still a fourth monthly decline and a low since December.
Treasury Yields Extend Move Higher as Stocks Recover and Inflation Concerns Linger: U.S. equities opened with some energy on Tuesday, recovering early and sharply from a tech-led dive to start the week. The tone had improved overnight even as Treasury yields posted modest increases, evidenced by solid gains across Europe and a 0.4% pre-market gain for U.S. futures. The major stock indexes surged at the opening bell, pushing the S&P 500 up by more than 1.5% by 10 a.m. CT and back above its 100-day moving average. Tech stocks recovered, cyclical stocks improved, but financials leaped past the rest as the Treasury curve moved higher and steeper. Treasury yields had risen overnight during European trading, but stair-stepped higher early in the U.S. session as stocks opened strongly, energy commodities continued their climb, and the ISM’s Services Index rose unexpectedly in September (more above). The S&P 500 pared its gain to close 1.1% higher, falling back below its important 100-day average. Ending down from session highs, the 2-year yield rose 0.6 bps to 0.28%, the 5-year yield added 2.9 bps to 0.97%, and the 10-year yield jumped 4.7 bps to 1.53%. Of interest, against a backdrop of growing inflation concerns, the breakeven inflation rate priced into 10-year TIPS yields jumped nearly 7 bps to 2.46%, a high since early June.
Treasury and other sovereign yields pressed even higher overnight, spooking global equities and extending recent volatility across asset classes. The 10-year Treasury yield jumped as high as 1.57% overnight to reach a new peak since the middle of June. Before 7 a.m. CT, the benchmark U.S. yield had drifted back to 1.54% and was lagging larger increases in 10-year yields across Europe, where surging energy prices have ignited worries about an energy-driven boost to inflation from levels which are already unusually elevated. The U.K.’s 10-year yield was trading at its highest since April 2019 while Germany’s 10-year yield climbed toward late-June levels. The latest rise in rates rocked stocks around the world on Wednesday. Asian stocks fell around 0.7% before Europe’s Stoxx 600 dove 1.7%. U.S. equity futures had also weakened and were lower by just over 1%. A move of more than 1% for the S&P 500, in either direction, would be its fifth in a row, marking the longest string of 1% swings since early November of 2020. Stocks appeared unfazed by the ADP beat and were still notably weaker on the day. Treasury yields, however, had declined with longer yields near session lows; the 10-year yield was 0.7 bps higher at 1.53%.