The Market Today

“Close” with China; Disappointing ADP Employment Report


by Craig Dismuke, Dudley Carter

Disappointing ADP Report Shows Definitive Slowing of Private Job Growth: ADP’s employment report projects that the economy added just 67k private sector jobs in November, well below economists’ expectations for 135k.  This marked the second-weakest report from ADP of the cycle, the only worse report was from May of this year.  The 3-month average is now down to 104k, also the second-weakest of the cycle, reflecting a definitive slowdown in job creation.  At this point, it appears the slowdown in job growth which began in 2015 and was expected to continue in 2018 was only delayed temporarily by the supportive fiscal/tax policies.  Weaker payroll growth, according to the ADP report, has hit both the manufacturing and services sectors.  Goods producing jobs declined 18k in November, 33k below their 12-month average.  The service sector added just 85k payrolls, 65k below its 12-month average.  This report portends a much weaker result than is expected in Friday’s BLS reports.

Mortgage Applications Drop on Slowdown in Refinancings: Mortgage applications for the week ending November 29 fell 9.2% on a 15.2% drop in refinance apps.  The 30-year mortgage rate during the reference week, according to the MBA data, held at 3.97%.  While refinancing activity has slowed a bit from September, activity remains up over 170% from the trough back in late-2018.  Purchase apps, meanwhile, rose 0.9% and continue to point to positive housing activity.

PMIs at a Sensitive Time for Markets: At 8:45 a.m. CT, the Markit Services PMI for November is expected to hold at its initial reading of 51.6.  This was a weak initial estimate but an improvement from the previous three months.  At 9:00 a.m., the ISM’s non-manufacturing index is expected to inch lower after bouncing higher in October from the second-weakest reading in seven years.  The non-manufacturing indices will be released at a time when a trade deal with China is proving difficult, trade threats have been escalated with the Eurozone, and several economic indicators have disappointed expectations – creating the potential for a sensitive market response.


YESTERDAY’S TRADING

Market Sentiment Dinged by Latest Step Back in Global Trade Situation: U.S. markets convulsed sharply Tuesday following the latest trade developments which increased fears that the U.S.-China trade situation could get worse before it gets better.  President Trump spoke to reporters in London ahead of the U.S. market open, indicating he may prefer to wait until after the 2020 presidential election before penning a trade deal with China.  The subsequent decline in equity futures and Treasury yields picked up as U.S. traders arrived to work and strengthened further just before 9 a.m. CT.  Fox reported that, contrary to growing speculation for postponement, the White House still planned to move forward with the 15% tariff on roughly $150B of Chinese goods imports set to take effect on December 15th.  Commerce Secretary Ross later confirmed the Fox report.  The S&P sank as much as 1.4%, the largest intraday drop since October 8, and Treasury yields posted double-digit basis-points pullbacks across the curve.  While the S&P 500 staged an impressive recovery to cut its loss to just 0.7%, the Treasury curve ended near its lows.  The 2-year yield closed down 6.2 bps at 1.54% while the 10-year yield dropped 10.3 bps to 1.72%, both one-month lows.


OVERNIGHT TRADING

Markets Continue to Move on Trade Headlines: Stocks markets in Asia, which had closed prior to President Trump’s hint yesterday at a possible trade delay, were broadly weaker Wednesday in a move that mirrored Tuesday’s losses in Europe and the U.S.  Indexes in Japan, Hong Kong, and Australia all fell more than 1% while Chinese markets were mixed and little changed.  The tone outside of Asia, however, has firmed up since the close of Asian trading following a more upbeat trade headline from Bloomberg news.  The report indicated that while the most visible developments recently have signaled negotiations may be deteriorating, both sides were working behind the scenes and “moving closer” toward reaching a deal before December 15th.  U.S. equity futures turned positive with the Stoxx Europe 600 and Treasury yields reversed their overnight decline.

Yields Hold Higher Despite Weak ADP: The gains occurred despite another piece of legislation aimed at Beijing’s non-economic activities passing the U.S. House of Representatives.  The bill aims to sanction Chinese officials for the mistreatment of Muslim minorities living in Xinjiang, and has already drawn a rebuke from Chinese officials.  “Do you think if America takes actions to hurt China’s interests we won’t take any action,” a Chinese foreign ministry spokeswoman asked rhetorically, answering “I think any wrong words and deeds must pay the due price.”  Before this morning’s ADP report, futures on the S&P 500 had gained 0.5%, the 2-year Treasury yield was up 1.4 bps, and the 10-year yield had added 2.6 bps.  After the weaker-than-expected private payroll tally, yields initially edged lower but quickly recovered to above their pre-release levels.


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