The Market Today

TODAY’S CALENDAR

ADP Projects Better-than-Expected Payroll Report: The ADP Employment report projected 227k private payrolls added in October, 40k above expectations and portending a stronger-than-expected BLS report on Friday.  Payroll growth was particularly strong for large businesses, up 102.4k which marks the third best level since 2011.  Larger businesses tend to lead smaller businesses in payroll growth, or lack thereof, as economic cycles change.  Economists expect total nonfarm payrolls to grow 195k in October but those projections may be revised slightly higher after this morning’s report from ADP.

 

Wage Growth Continues to Gain Traction: The 3Q Employment Cost Index rose 0.83% QoQ, slightly firmer than expected.  This brought YoY rate up to 2.83%, its fastest pace of growth of this cycle.  Benefit growth was surprisingly weak, up just 0.44% QoQ but actual wages were solid, rising 0.75%.  Wage growth has certainly gained traction over the past two years (see Chart of the Day) although it remains tame enough to keep inflation expectations in check.

 

Mortgage Apps Continue to Show Impact of Rising Rates: Mortgage applications for the week ending October 26 fell 2.5% WoW on a 1.5% drop in purchase apps and a 3.8% decrease in refi apps.  The broader trends of almost-zero refinance apps and weakening purchase apps remains in place.

 

TRADING ACTIVITY

Yesterday – Treasury Yields Finished at Daily Peaks as Stocks Rallied after Lunch to Close Near Highs of the Day: It turned out to be another volatile day for U.S. equities but the swings likely caused less heartburn considering they were contained within positive territory. The morning was a mix of ups and downs but the trend firmed in the afternoon, helping lead the major indices to a close near the highs of the day. The Dow led with a gain of 1.8%, as Boeing shares snapped back and accounted for nearly a fourth of the index’s daily increase. Shares of the jet-maker recovered after plunging more than 6.5% on Monday in the aftermath of a deadly crash involving one of its aircraft in Indonesia over the weekend. Elsewhere, the S&P 500 and Nasdaq both rose 1.6%. All 12 sectors of the S&P gained with 10 of those adding more than 1%. Treasury yields had risen overnight but gave up most of those gains early in U.S. trading. The late-afternoon rally in U.S. equities, however, helped push yields back up before the close. The entire curve rose between 3.3 bps and 3.8 bps. The 2-year yield added 3.4 bps and finished one tick off its highest mark of the day. The 10-year yield added 3.8 bps and closed at its daily high-tick of 3.12%.

 

Overnight – Awful October Looks to End on Upbeat Note: Global equities appear set to end an awful October on an upbeat note. A positive U.S. session Tuesday helped overall sentiment and traders pointed to positive earnings as providing an extra boost. Japan’s Nikkei jumped 2.2% to trim its monthly loss to 9.1%. The Bank of Japan left its policy stance unchanged, trimmed its inflation forecast to reflect below-target inflation persisting through at least fiscal 2020 (ends March 2021), and noted risks are skewed to the downside. However, they remained cautious about possible negative effects of its yield-curve control policy, noting it will be “necessary to pay close attention to future developments” regarding bank profitability. In China, the CSI 300 rose 1.4% but fell 8.3% for October. China’s October PMIs were weaker than expected with the manufacturing index falling to its weakest level (50.2) since a contractionary 49.9 in July 2016. The composite hit an eight-month low. The Stoxx Europe 600 was 1.6% higher which, if it holds, would limit the monthly damage to 5.8%. The Eurozone’s unemployment rate held at 8.1% for a third month, the lowest since 2008, and inflation ticked up as expected. Headline CPI rose 0.1% to 2.2%, a six-year high, while core added 0.2% to 1.1%, matching a 14-month high and 0.1% below its highest since March 2013 (1.5%.) In the U.S., the Nasdaq (+1.2%) was leading equity futures higher, the 2-year yield (2.88%) was 2.4 bps higher, and the 5-year (2.99%) and 10-year (3.16%) yields had added roughly 3.3 bps.

 

NOTEWORTHY NEWS

New 18-Year High for Consumer Confidence: The Conference Board’s October index tracking confidence of U.S. consumers topped estimates and, after September’s result was knocked down a few points in revision, was the strongest since September 2000. Under the headline, both the current assessment and future expectations indices also reached their best levels since 2000. The current assessment benefited from consumers signaling more optimism around both the general business environment and the U.S. labor market. The number who described business conditions as “bad” was the lowest since 2000. Echoing the optimism of almost every other labor market indicator, the difference between the number of consumers who said job opportunities were plentiful and those who disagreed hit its widest mark since January 2001. Looking ahead six months, there were also net improvements expected in business conditions, the labor market, and family incomes. Consumers have been a major driver of recent economic strength but there is debate about the durability of the current pace once the initial tax-cut boost fades. This October report on confidence shows that, while there may be questions about their ability to keep spending, there appear to be no concerns about their willingness.