The Market Today
ADP Disappoints, Remains Strong; Initial Jobless Claims Hit New Low Since 1969
by Craig Dismuke, Dudley Carter
ADP Report Disappoints, Remains Strong: The August report on private nonfarm payroll growth showed 163k jobs added, 37k below expectations and the weakest monthly report since October 2017. However, at 163k, the ADP report continues to reflect a healthy level of job growth. Goods-producing jobs increased 24k, hurt particularly by weakness in construction and natural resources and mining jobs. Manufacturing jobs grew 19k, remaining above their 12-month trend rate. Service sector jobs also disappointed, growing just 139k versus their 12-month run rate of 154k. Interestingly, medium-sized companies continue to set the pace for job growth, as has been the case since early-2016. The 6-month average of payroll growth for companies with between 50 and 499 employees has risen from 43k in late-2015 to 98k as of August. In contrast, small businesses, those with fewer than 50 employees, have seen payroll growth weaken as they wrestle with finding quality labor. The 6-month average of payroll growth for smaller businesses has dropped from 93k to 40k over the same timeframe. Heading into tomorrow’s BLS labor reports, nonfarm payrolls were expected to have expanded 198k in August, although late-reporting economists may cause that projection to drop in the wake of the weaker ADP report.
Initial Jobless Claims Drop to Lowest Level Since 1969: Initial jobless claims for the week ending September 1 fell 10k to 203k, the lowest rate since December 5, 1969. The 4-week average is also down to its lowest level since 1969 at 209.5k.
ISM Non-Manufacturing Index and Williams’ Comments: At 9:00 a.m. CT, the ISM Non-Manufacturing Index for the month of August is expected to show an increase in activity from 55.7 to 56.8. Already this week, the ISM Manufacturing index has blown out expectations, rising to its highest level since 2004. The final revision to the July Durable Goods Orders report will be released. New York Fed Bank President Williams is scheduled to speak at 9:00 a.m. CT in a “fireside chat” on the health of the national economy from Buffalo.
Yesterday – Tech Slump Dragged on U.S. Indexes: U.S. tech companies were the biggest drag on the major indexes on Wednesday as evidenced by the Nasdaq losing a day’s worst 1.2%. The S&P 500 sagged 0.3% with its tech sector falling an outsized 1.5%. The loss for that sector, which accounts for roughly a quarter of the total index, was large enough to ward off the uplift from gains in eight of the remaining 10 sectors. Utilities and consumer staples rose more than 1% while energy and consumer discretionary shares joined the tech sector in negative territory. Oil prices slipped and online retailers led the consumer discretionary lower, seemingly caught up in the same downdraft that did the damage to the major tech names. Tech companies succumbed to daily selling pressure as executives from Facebook and Twitter testified before the Senate Intelligence Committee on election interference via their online platforms. After an up and down day, the 2-year Treasury yield ended 0.4 bps lower at 2.65% while the 10-year yield closed 0.4 bps higher at 2.90%. Dollar strength, which has been cited as one pressure on emerging markets, abated Wednesday as the currency slipped 0.3% for its first decline in four days.
Overnight – Markets Take a Breather as EM Currencies Hold: The broad tone behind global markets stabilized overnight as some of this week’s most highlighted emerging market currencies, specifically the Argentinian Peso, Turkish Lira, and South African Rand, moved up against the Dollar. However, despite the daily firming up, all three remain severely battered from the last several months’ sell-off. Ahead of this morning’s busy U.S. economic calendar, U.S. equity futures had recovered by less than 0.1% and Treasury yields inside of 30 years had inched higher by under 0.5 bps. Those quiet moves followed a mixed performance for European equities and another move lower in Asia. The MSCI Asia Pacific Index fell for a sixth day, the longest stretch since December. In addition to the persistent uncertainty around emerging markets, the U.S. could move forward with tariffs on another $200B of Chinese imports as soon as this week, once the public comment period closes today. Chinese officials said overnight they will be forced to take necessary retaliatory steps based on the U.S. decision. The Stoxx Europe 600 had drifted 0.1% lower, despite most of the major national indexes perking up, and is trading at its lowest level since early April. After the softer ADP report, the Treasury curve moved down to trade around 0.5 bps lower and the Dollar added to its overnight decline.
Fed’s Bullard Believes the Fed Should Dump the Phillips Curve: In his Wednesday remarks, St. Louis’s Bullard (2019 voter) said the Fed should place “more weight on market signals” than on a “largely broken down” Phillips curve. In his presentation, titled “How to Extend the U.S. Expansion: A Suggestion”, Bullard said instead of going all-in on the historical relationship between unemployment and inflation, the Fed should “put more weight on financial market signals, such as the slope of the yield curve and market-based inflation expectations.” He caveated that such signals are “not infallible” but considering them “naturally constitutes a forward-looking monetary policy strategy” that “could help…better identify the neutral policy rate and possibly extend the U.S. economic expansion.” “Generally speaking, financial market information suggests that current monetary policy is neutral or even somewhat restrictive today,” he said, and suggests the June dot plot “is too hawkish for the current macroeconomic environment.” That stands in contrast to the “conventional wisdom” which “suggests that the policy rate should continue to rise” but which “could cause the FOMC to go too far, raising recession risk unnecessarily.” In post-presentation comments to reporters, Bullard said the Fed “has been preemptive against inflation pressure” and noted his “best guess” is the yield curve could invert in 2019, if not before the end of this year.
Kashkari Echoes Tuesday Tone on Wednesday: Minneapolis Fed President Kashkari (2020 voter) told attendees at a Montana Town Hall event that current wage and inflation metrics indicate the labor market could be less tight than a 3.9% unemployment rate would seem to signal. As a result, a misstep by Fed policy could pose a risk to the U.S. economy, as could the ongoing trade spats and troubles in certain emerging markets. Kashkari said he is still worried by the increasingly flat yield curve and would be strongly opposed to changing the current balance sheet unwind process. Some market watchers have speculated the Fed could hasten the balance sheet normalization to give an extra lift to the long end of the yield curve.