The Market Today

ECB Holds; U.S. Capital Goods Orders Portend Continued Weakness


by Craig Dismuke, Dudley Carter

Uncertainty Continues Taking Toll on Business Investment in September Durable Goods Orders Report: September’s preliminary report on durable goods orders was quite disappointing with headline orders down 1.1%, core orders down 0.3%, core capital goods orders down 0.5%, and core capital goods shipments down 0.7%.  All were weaker than anticipated.  Headline orders were dragged lower by a 12% drop in the volatile nondefense aircraft category; however, the weakness was evident broadly. Autos/parts/supplies were down 1.6% which is likely being affected by the ongoing UAW strike.  Even absent this, orders were weak. The 0.5% drop in core capital goods orders, an indicator of future business investment in equipment, followed August’s 0.6% decline to make 3Q the weakest of 2019.  Likewise, the 0.7% decline in shipments, which feeds directly into the GDP report’s tally of business investment in equipment, comes on the heels of a 0.7% drop in July and an unchanged August report. It now appears that business investment in equipment will contract close to 3.5% in 3Q which would be the weakest result since the manufacturing recession in 2016. Trade uncertainty and the global manufacturing malaise are clearly weighing on U.S. business investment and it does not appear to be easing up.

Labor Data Remain Solid: Initial jobless claims for the week ending October 19 fell from 218k to 212k.  The claims data continue to point to a strong labor market.

Markit PMIs to Give More Insight into Manufacturing Sector: The first look at Markit’s October reports on manufacturing and services activities is scheduled for 8:45 a.m. CT.  October’s regional Fed indices have been mixed with the Richmond and New York indices stronger than expected but the Philadelphia index soft.  The national data on manufacturing, however, have largely remained weak.  Case in point, the ISM Manufacturing index has continued to plummet and, as of September’s report, is at its weakest level since the recession.  The Markit PMI, while still less prominent in the U.S. than the ISM report, did turn higher in last month’s report.  Another leg higher would be an encouraging sign for the sector. Also on the schedule today, the Kansas City Fed will release its October index at 10:00 a.m.

New Home Sales: September’s new home sales report is expected to show a 1.6% drop in sales after jumping 7.1% in August.  New home sales have particularly benefited from the drop in mortgage rates, now up 28% since last October.


YESTERDAY’S TRADING ACTIVITY

Stocks Accelerated Late to Notch Solid Gains: After a wobbly up and down session, U.S. equities closed on a positive uptrend and near the highs of the day. There were no significant headlines on trade or Brexit throughout the day, leaving investors free to sift through a slew of earnings releases and other corporate-related headlines. The S&P 500 rose 0.3% and led smaller 0.2% gains for the Dow and Nasdaq. The energy sector closed at the top of the S&P 500 as crude prices rallied more than 2% to a three-week high. Prices had ticked up a day before on a report OPEC was considering deepening its production cuts. Prices gained again Wednesday after the EIA reported a larger-than-expected drop in U.S. inventories of crude and gasoline. Consumer discretionary companies slid to the bottom on large declines in shares of Nike and Under Armour; both companies recently announced CEO changes.

Treasury Yields Recovered to End Marginally Higher: Treasury yields also grinded higher during U.S. trading, erasing an overnight drop to end less than 1 basis point higher for the day. The 2-year yield added 0.6 basis points to 1.58% while the 10-year yield rose 0.4 basis points to 1.76%. While the Fed headlines have slowed since officials entered the quiet period over the weekend, there was a bit of news related to the ongoing temporary operations recently implemented to calm overnight funding markets. The size of overnight operations will rise to at least $120B starting tomorrow, up from $75B in recent weeks. The two-week term operations scheduled for today and next Tuesday (10/29) were increased from $35B to $45B.


OVERNIGHT TRADING ACTIVITY

European Data Stabilizes in October but Remains Weak: Global equities have moved higher Thursday while sovereign yields were mixed but little changed following the ECB’s latest policy decision. Six weeks ago, Europe’s central bank announced significant changes to its monetary policy stance in an attempt to shock its moribund economy back to life and lift inflation pressures. Ahead of this morning’s decision, preliminary data showed economic activity stabilized somewhat in October, but at a weak level. The Eurozone’s composite PMI rose less than expected to 50.2, with a slight improvement in the services sector countered by stagnant manufacturing. Activity in France actually perked up more than expected while Germany’s manufacturing activity remained weak. The 41.9 reading for Germany’s manufacturing PMI was a modest improvement from September, but a tenth consecutive month of contraction.

ECB Confirms Past Changes but Breaks Little New News: Shortly after the PMIs were released, the ECB announced it was making no changes to its recently-updated policy. There was little news in the Statement other than confirmation of its previous changes that included a more-deeply-negative deposit rate and a plan to buy bonds at a monthly pace of 20B euro for “as long as necessary to reinforce the accommodative impact of its policy rates.” Today’s meeting is the last before current President Draghi’s eight-year term runs out, and he hands the reins to his successor Christine Lagarde, formerly the head of the IMF. Ahead of this morning’s U.S. data, tech was leading pre-market gains for U.S. equity futures and the Treasury curve was marginally lower. The 2-year yield dipped 1.2 basis points while the 10-year yield dropped 1.6 basis points.


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