The Market Today
ADP Shows 219k July Jobs; FOMC Day; Markets Digest BoJ Decision
by Craig Dismuke, Dudley Carter
Busy Day Begins with Another Strong Jobs Report: Another month and another stronger-than-expected metric for the labor market. The July ADP Employment report showed 219k private payrolls added for the month, beating expectations of 186k. ADP’s report showed a healthy mix from both the service sector (+177k) and the goods-producing sector (42k). Most of the indicators are very positive heading into Friday’s BLS nonfarm payroll report. Economists currently expect the report to show 190k total payrolls added. It appears economists’ expectations could be low; however, July has historically produced some unexpected payroll reports because of a handful of seasonal factors which impact July’s jobs numbers.
Manufacturing, Construction, and Autos: At 9:00 a.m. CT, the ISM Manufacturing index is expected to show activity pulled back fractionally in July from exceptionally strong to superbly strong. June’s construction spending report will also be released. Construction spending has been a mixed bag lately with business investment in structures and government construction spending picking up but residential construction facing some headwinds. Throughout the day, the July auto sales data will be released. However, in the absence of GM’s numbers, will mean little for analysts.
FOMC Decision Day: The FOMC will release their meeting results at 1:00 p.m. CT. They are not expected to hike but are expected to keep a September hike teed up. We will be looking for any changes in their outlook for inflation or financial conditions.
Yesterday – Stocks Rose on Trade Hopes, Treasury Curve Flattened on U.S. Data and BoJ Decision: U.S. stocks gained Tuesday as a more-than-2% rally in industrials led the S&P 500 index 0.5% higher on the day. The Dow rose a slightly smaller 0.4% while the Nasdaq added a stronger 0.6%. Industrials outperformance was tied in large part to headlines that hit just minutes before the opening bell showing the U.S. and China were hoping to rekindle conversations in an attempt to avoid a trade war. That report also boosted broader sentiment that kept eight of 11 sectors positive on the day. There was more mixed news related to NAFTA, as a separate report indicated the U.S. and Mexico were making headway in trade talks that representatives from Canada had not been invited to. Telecom companies fell the most to give back some of Monday’s gains while financials and energy companies also slipped below their prior close. Oil prices fell nearly 2% and the Treasury curve undid some of Monday’s steepening. The 2-year yield rose 0.8 bps to 2.67% after positive income and spending data while the 10-year yield settled 1.3 bps lower after the BoJ’s dovish decision and U.S. inflation that fell short of estimates.
Overnight – Trade Tensions Return, Japanese Yields Make Delayed Response Higher: Global equities are generally weaker on the first day of August as concerns around U.S.-China trade tensions returned amid mixed messaging over the last 24 hours. U.S. stocks got a boost yesterday from news that officials from the world’s two largest economies were hoping to resume trade talks in an attempt to ease ongoing tensions and avoid a trade war. However, a subsequent report Tuesday evening said the U.S. proposal for tariffs on another $200B of goods brought in from China was still in play, and that the White House was considering lifting the applicable rate from the original 10% to 25%. Chinese officials chastised the report as the U.S. “blackmailing and pressuring” it and said they “will surely take countermeasures to uphold our legitimate rights and interests.” Chinese stocks fell the most in Asia with the CSI 300 down 2.0% to its lowest level in two weeks. In addition to the trade uncertainty, the non-government PMI tracking China’s manufacturing sector slipped to an eight-month low. Japanese government bond yields remained in focus as they sharply reversed yesterday’s decline that followed the BoJ’s decision to leave policy rates unchanged and maintain a pledge to keep up its “powerful monetary easing.” The BoJ did, however, widen the acceptable range for the 10-year yield to fluctuate around zero, from 0.1% to 0.2%, as part of that decision. The 10-year yield rose more than 6 bps overnight to 0.115%, its biggest intraday increase in two years to its highest yield since January 2016. Global yields have responded by moving higher as well, although Treasurys have lagged towards the back of the pack. Treasury yields doubled their overnight rise after this morning’s ADP report, with the 2-year Treasury yield 0.8 bps higher and the 10-year yield up 3.5 bps to 2.995%.
Consumer Confidence Improved but Details Were Mixed: Consumer confidence moved back up unexpectedly in July according to the Conference Board’s latest release with overall sentiment inching up 0.3 points to 127.4, its third strongest level of the year and fourth strongest level since 2000. The small improvement was the net result of the current assessment climbing to a new 17-year high (March 2001) and offsetting a softening of future expectations (lowest since December). In fact, the difference between the current assessment and future expectations hit its widest level since May 2001. Consumers were more confident about current business conditions and their prospects for finding employment. The share who said business conditions were bad dropped to a new 17-year low while the difference between those who said jobs were plentiful and those who said they’re hard to get jumped to a new 17-year high. Looking forward, fewer expect the status quo to persist over the next six months. While there were more who expected the business environment and labor market to be better six months from now, there were also a greater number who expected both to worsen (split exodus from the “Same” category). Disappointingly, the net difference expecting their incomes to grow shrank for a fourth month to an 11-month low. The number expecting to buy a car recovered from a 32-month low but those planning a home purchase fell to its lowest level in two years.
Bloomberg: Municipal Junk Soars as Economy Roars – “A funny thing happens when the economy booms: Investors crawl out on thinner and thinner limbs. It’s happening right now in the bond markets, where the only part that is lucrative is usually the least appealing to all but the nerviest players: distressed state and local governments with the lowest credit ratings (or none at all). Think of bankrupt Puerto Rico, tobacco settlements with diminishing revenues, and the not-yet-finished New Jersey Mega Mall. … Investors can’t get enough of this junk while shunning Treasuries and similar investment-grade securities. … The favorite for many of the top funds are Sales Tax bonds sold by the Puerto Rico Sales Tax Financing Corp. The securities, which are in default, are rated “highly speculative” by Moody’s and have no rating from Standard & Poor’s. They’ve almost doubled in price, from 43 cents on the dollar in January to 82 cents. Tobacco debt, such as California’s non-rated $1.7 billion June sale due in 2047 and backed by its share from the state’s 1998 legal settlement with cigarette makers, similarly rallied to more than 102 cents on the dollar as soon as they traded, according to data compiled by Bloomberg. … To be sure, any evidence that the expansion is on its last legs could make high-yield municipal bonds the first casualty of the downturn. For now, the bond market isn’t forecasting that scenario.”