The Market Today
ADP and GDP Show Strong Results; Consumer’s Confident, Home Prices Rise; North Korea Fears Fade
by Craig Dismuke, Dudley Carter
Commentary on the Impact of Hurricane Harvey on Affected Municipal Credits (Dennis Porcaro, SVP Vining Sparks): The natural disaster that has befallen the Houston/Harris County area, while devastating, is not the first major natural disaster to impact the area, the region, or the US in the recent past. At this time we note that rebuilding will take time, but historically most natural disasters have resulted in little to no impact on municipal credits in the long-term. Short-term concerns have historically been addressed through actions either at the local, regional or national (Federal) level or through a combination of all, to include insurance and it is reasonable to assume that the same will occur here. As to municipal investments that are enhanced by bond insurance or the PSF, we expect this enhancement to be honored, if need be. In closing we would like to highlight that the most important thing a client can do at this time is to know their investment in the area, and be current on their reviews, so that as information becomes available about their specific investment they can make an informed decision on said investment.
Today’s Calendar – ADP and GDP Show Strong Results –
ADP Employment Report Projects Another Surprisingly Strong Month of Job Creation: The ADP Employment report for August showed a much stronger-than-expected result with private payroll growth projected at 237k. Additionally, the July data were revised up to show 201k versus an initial report of 178k. Job creation in the services sector was reasonably good (+33k versus 12M average of 28k) but the service sector dominated the strong data. The service sector added 204k, 34k above its 12-month average. There was noteworthy strength in trade/transport/utilities jobs and weakness in professional/business services, which should have a slightly negative impact on the earnings data.
2Q GDP Revised up to 3.0%, Shows Strong Quarter and Points to Strong Future: 2Q GDP was revised higher in its first revision, from 2.6% QoQ SAAR to a robust 3.0%. The details of the revision were quite encouraging with personal consumption revised up from 2.8% to 3.3% reflecting a much healthier rebound from 1Q for consumer activity. Personal income was revised higher while the savings rate was revised down from 3.8% to 3.7%. In addition to the stronger consumer, business investment was revised up from 5.2% growth to 6.9% as businesses invested more in intellectual property. Housing investment was slightly less negative and government spending was marked down from +0.7% to -0.3%. Inventories were not revised up materially, only a small revision higher, meaning the inventory rebuild should still occur in future quarters. Corporate profits also posted a small gain, up 1.3%. Real final sales, the bottom line metric for how strong domestic activity was, was revised up from 2.4% to 2.7%. The 2Q GDP revision now shows a strong rebound from 1Q, shows a strengthening consumer, strengthening business investment, and still leaves the inventory rebuild for a future quarter. Overall, a very solid report.
Overnight Activity –
North Korea Fears Fade, Yields Rise on German Inflation and U.S. Hiring, Harvey’s Damage Continues to Drive Gas Prices Higher: Global equities are firmer Wednesday and sovereign yields have climbed from Tuesday’s finish. As has been the case with each recent provocation from North Korea, the knee-jerk flight to quality following Monday’s missile launch was short-lived. Asian equities started Tuesday stronger following the positive momentum shift throughout Tuesday’s U.S. session (more below). European equities also improved with the Stoxx Europe 600 0.6% higher. Sovereign yields in Europe are higher across all major countries’ rate curves. Germany’s 10-year yield is up 2.6 bps and near its high of the day after stronger-than-expected inflation data. Germany’s CPI index rose 0.2% in August which lifted the YoY rate to 1.8%, the fastest since April. In the broader Eurozone, economic confidence hit its highest level in August since 2007. Treasury yields added to an overnight rise after this morning’s stronger-than-expected ADP report. The Dollar also jumped to its daily high. These moves strengthened further after stronger-than-expected consumer spending drove the better-than-expected 2Q GDP revision. The 2-year yield added 2.2 bps to 1.34% while the 10-year yield rose 1.4 bps to 2.14%. Also overnight, Tropical Storm Harvey made landfall in Louisiana and continues to impact energy commodities. Gasoline prices rose another 5% overnight and are now up 18% over the last six days. Crude prices fell another 1.0% and are down 5% since the storm’s effect began.
Yesterday’s Trading Activity –
U.S. Trading Erases Overnight Risk-Off Moves: The flight to quality that began Monday evening, after North Korea launched a missile over Japan, and peaked around 3 a.m. CT had begun to moderate ahead of U.S. trading. The moderation continued during Tuesday’s session as stocks, Treasury yields, and the Dollar climbed back steadily throughout the day. The Dow fell as much as 135 points, or 0.62%, at the open, setting the daily low just one minute into the session. From that point, the Dow climbed 0.88% to end the day 0.26% higher. The S&P and Nasdaq followed a similar path and ultimately gained 0.08% and 0.30%, respectively. Treasury yields remained lower at the close but had notably pared their maximum intraday declines. The 2-year yield fell 1.0 bps to 1.32% (-3.8 bps intraday extreme), the 5-year yield fell 3.7 bps to 1.70% (-6.2 bps intraday extreme), and the 10-year yield dropped 2.8 bps to 2.13% (-7.3 bps intraday extreme). The Dollar recovered from down 0.64% to close up 0.14% as the Euro completely erased an intraday gain that had pushed the currency above $1.20 for the first time since 2015. The bid for the Yen also eased. In commodities, the focus remained on shuttered oil refiners. Gasoline prices rallied 6% Tuesday to their highest level in 25 months and crude prices fell 0.5% as Harvey headed toward Louisiana. The spread between crude and gasoline reached its highest level since July 2015.
Yesterday’s Data –
Confident Consumers Should Continue to Drive Growth: Consumer confidence improved unexpectedly in August according to the Conference Board’s latest release. The headline index rose from a revised 120.0 in July (previously 121.1) to 122.9 in August, the second strongest reading since 2000. The better headline level was supported by gains in both the current assessment and future expectations indices. The expectations index inched higher from 103.0 to 104.0 while the assessment of the current situation jumped from 145.4 to 151.2. Consumers expressed more confidence in current business conditions, but the biggest improvement was in their assessments of the labor market. The labor market differential – % that believe jobs are plentiful minus the % that believe jobs are hard to get – hit a new high for the cycle and the strongest level since July 2001. Looking ahead, consumers expect both the improvement business conditions and employment opportunities to moderate over the next six months but more believe their incomes will rise. The difference between the percentage of those expecting their incomes to rise and those expecting their incomes to decline hit its second highest level since 2006.
S&P Case-Shiller Shows More Home Price Gains: The S&P Cash-Shiller 20-City Metro Home Price Index rose 0.11% in June compared with May and 5.65% from June 2016; both were slightly better than expected. The June report also included upward revisions to the May data which raised the YoY rate in May from 5.69% to 5.74%. The YoY rate of price appreciation for the 20-City Metro area has slowed in each of the last three months and June’s 5.65% gain was the weakest of 2017. However, in a longer context the pace of price increases remains at one of its strongest levels since 2014. While the pace slowed in the major metro areas, the broader national index rose 5.77% from June 2016 and at its fastest pace in three years. Home prices continue to be pushed higher as a result of steady demand and tight supplies.