The Market Today
Conflicting Data Show Persistent Strains and Strengths
by Craig Dismuke, Dudley Carter
U.S. cases continue to rise at a rapid rate, now up almost six-fold from the end of June. San Francisco became the latest municipality to reinstate mask mandates in public indoor areas.
Today’s Calendar – Factory Orders, Auto Sales, and Fedspeak: The June factory orders report is expected to show a 1.0% MoM gain in new orders (9:00 a.m. CT). July’s auto sales will be released throughout the day and are expected to have dropped from 15.36m to 15.10m (units ann.), continuing its supply-driven decline after peaking at 18.51m units in April. At 1:00 p.m. CT, Fed Governor Bowman will speak. Also worth noting, SEC Chairman Gary Gensler will give a speech on cryptocurrencies today at the Aspen Security Forum. In an interview with Bloomberg, Gensler said, “While I’m neutral on the technology, even intrigued — I spent three years teaching it, leaning into it — I’m not neutral about investor protection.”
Governor Waller Joins Taper Party: Fed Governor Christopher Waller said he preferred to move forward with tapering asset purchases “early” and “fast” in a CNBC interview yesterday. Waller said he still expects inflation to moderate and, while the delta variant is causing uncertainty, does not expect it to have a significant impact on economic activity. He indicated a preference for tapering MBS purchases faster than Treasurys and said a strong jobs report on Friday could warrant a September taper announcement. He also indicated a preference for tapering more quickly than in 2015.
ISM Manufacturing Index Shows Broken Supply Chain for Raw Materials and Workers: The July ISM Manufacturing index pulled back from 60.6 to 59.5 as output remains weighed down by supply chain disruptions and employment challenges. According to a statement from the ISM Chair, “all segments of the manufacturing economy are impacted by near record-long raw-material lead times, continued shortages of critical basic materials, rising commodities prices and difficulties in transporting products. Worker absenteeism, short-term shutdowns due to parts shortages and difficulties in filling open positions continue to be issues limiting manufacturing-growth potential.” On positive notes, the supplier deliveries index declined for a second consecutive month indicating some improvement in the supply chain and the employment index rose back above 50 to 52.9.
Markit Manufacturing PMI Rises to Record-High: The Markit manufacturing PMI for July highlighted the same story seen in the ISM report. The index was revised up to 63.4, its highest level on record. According to the release, “Unprecedented supplier shortages and delays continued to exert upward pressure on input costs and stymie firms’ ability to process incoming new work.” Markit’s Chief Economist noted, “July saw manufacturers and their suppliers once again struggle to meet booming demand.”
June Construction Spending Shows Residential Gains but Non-Residential Weakness Persisting: Construction spending disappointed expectations in June, rising just 0.1% MoM as the same trends evident during the pandemic recovery remained intact. Private residential spending was the bright spot, up 1.1% MoM on a 1.8% gain in single family and a 0.4% gain in home improvement spending. Private residential construction spending is now up 29.3% YoY. Private non-residential spending continued to decline, down 0.7% MoM as weakness persisted in all categories: lodging (-26.5% YoY), office (-9.1% YoY), commercial (-2.1% YoY), health care (-5.0% YoY), power (-1.9% YoY), manufacturing (-0.7% YoY), and other (-10.6% YoY).
Markets Started August the Way They Ended July, with Stocks Hovering Near Records and Treasury Yields Flattening Lower: Following an upbeat global session overnight that pushed stocks higher across Asia and Europe, the major U.S. indexes closed mixed Monday. The Nasdaq inched up by less than 0.1% while the Dow and S&P 500 dipped 0.3% and 0.2%, respectively. Materials and industrials companies led declines in more than half of the S&P 500’s sectors following the mixed readings on U.S. manufacturing activity from Markit and the ISM (more above). After the ISM index disappointed, and despite another Fed official throwing support behind a taper announcement soon (more above), longer Treasury yields declined. The 10-year yield fell 4.5 bps to 1.177%, its lowest close since February 11. Compared with 10-year market-based inflation expectations of 2.36%, the real 10-year yield fell to -1.18%, a record low. The 2-year yield dropped 1.2 bps to 0.17%.
Treasury yields were mixed and little changed on Tuesday while U.S. stock futures gained with European indices, despite a down day in Asia tied to additional regulatory concerns in China. European stock gains were attributed to positive daily corporate earnings results, nudging the Stoxx 600 0.4% higher. Dow futures had risen by a similar amount shortly after 7 a.m. CT while contracts on the S&P 500 had added 0.3%. At 7:30 a.m., the 2-year Treasury yield was 0.4 bps higher while the 10-year yield had dipped 0.5 bps after rising overnight. European yields were mixed and also little changed, despite producer prices in the Eurozone jumping 1.4% MoM and 10.2% YoY, both on top of expectations.
ICYMI – July 2021 Monthly Review: Despite the Fed taking another step towards tapering its asset purchases, Treasury yields fell for a fourth month in July as inflation fears remained contained and global spread of the Delta COVID-19 variant revived concerns about the economic expansion potentially being interrupted. Click here to view the full recap.