The Market Today

TODAY’S CALENDAR

Economy Adds 157k Jobs in July, Slack Continues to Tighten: The economy added 157k total payrolls in the month of July, weaker than the expected 193k.  However, there were also 59k in positive revisions to the previous two months’ reports bringing the total number of jobs added in the July data to 216k, keeping the 3-month average strong at 224k.  While the 157k tally was weaker than recent trends, it remains in good territory.  Fed officials are expecting +100k payrolls per month to be the sustainable rate longer term given the weaker rate of labor-age population growth.  Looking at the details, the manufacturing sector was notably strong, adding 37k payrolls (12M avg. +27k).  Leisure and business services sectors also beat their 12-month averages, up 40k and 51k, respectively.  Weaker sectors in July included government (-13k), finance (-5k), and transportation (-1k).  Also worth noting, there were 32k fewer payrolls in the hobby, toy, and game stores sector which is likely to be the result of Toys-R-Us shuttering 800 stores and laying off 30k employees (according to CNBC figures).

 

The household report, only 105k more people reported as being in the labor force while 389k more people reported as employed.  This brought the headline unemployment rate down from 4.05% to 3.87%.  More impressive, the secondary measures of slack were much improved including a 43k drop in those unemployed long-term, a new cycle-low for workers employed part-time for economic reasons, and a 17-year low for the underemployment rate (down from 7.8% to 7.5%).

 

As for the earnings and hours-worked data, the results were largely as-expected despite some moving parts.  Hours worked were revised up in June from 34.5 to 34.6 which brought the average hourly earnings growth rate down from +0.2% to +0.1%.  However, hours worked pulled back in the July figures to 34.5 which helped boost average hourly earnings 0.3% MoM, keeping the YoY rate unchanged at +2.7%.  While this does not mark an acceleration in earnings growth, the recent data have shown more traction with the 3M/3M annualized pace back up to 2.9%.

 

Bottom Line: The July jobs report shows continued tightening of the labor market with the underemployment rate falling to a 17-year low and the unemployment rate pulling back below 4.0%.  While payroll growth disappointed, the trends remain stronger-than-sustainable and July’s numbers were likely affected by a one-off event.  Average hourly earnings remain stuck in the 2.5-2.8% YoY growth range, but have shown a bit of momentum in recent reports.  This report is unlikely to dissuade the Fed from hiking in September but is also unlikely to accelerate the pace of hikes.

 

TRADING ACTIVITY

Yesterday – Apple’s Trillion Dollar Day Kept the Early Negativity Away: Equities dropped at the open but a quick turn higher by shares of Apple Inc. led to a recovery in sentiment more broadly. After a brief dip, shares of the tech giant rebounded and climbed steadily for the remainder of what turned out to be a historic day for the company. Thursday’s near-3% rally was enough to make Apple the first U.S. company to achieve a market capitalization of at least $1 trillion. The Nasdaq tracked Apple’s path and outperformed the other major indexes with a 1.2% gain. The S&P 500’s tech sector rose 1.4% and led the overall index up 0.5% despite smaller drags from four other sectors. Energy companies fell for a third day despite oil prices rallying on the decline in Cushing inventories. The industrials and materials sectors also dropped and continued to be weighed down by resurgent trade concerns. Those concerns also kept Treasury yields lower for the day. After reaching a two-month high yesterday, the 5-year (2.86%) and 10-year (2.99%) yield pulled back 2 bps. The 2-year yield settled 1.4 bps lower to 2.66%.

 

Overnight – PBOC Steps Up to Support the Yuan: U.S. assets were steady ahead of this morning’s jobs report amid a mixed session globally overnight. U.S. equity futures were firmer by 0.1% to 0.3%. The Treasury curve was teetering in a tight range around unchanged. The Dollar was more volatile, erasing marginal overnight gains with a quick drop just after reports said the PBOC was taking measures to make yuan speculation more expensive. The Dollar turned lower on a headline that the PBOC was raising the reserve requirement on trades involving forward currency forwards. The yuan has been beat up in the ongoing trade dispute between the U.S. and China, reaching a new 14-month low overnight before that announcement. The Chinese currency is down roughly 10% since March. Overnight, the tone that weighed on the yuan also drove Chinese stocks 1.7% lower. The CSI 300 fell 5.8% this week. European equities are more chipper, with all 12 sectors of the Stoxx Europe 600 in positive territory and the index up 0.7%, its largest daily gain of the week. Apple’s big Thursday has helped push European tech companies into a tight battle for the top sector spot.

 

NOTEWORTHY NEWS

Factory Orders Match Estimates but Business Spending Looks Slightly Softer: June’s factory orders report matched expectations but included negative revisions to initial estimates for capital goods activity. Total factory orders were up 0.7%, helped out by healthy rebounds in auto-related (+4.4% after a -4.5% result in May) and nondefense aircraft-related (+4.3% after a -11.6% result in May) activity. Stripping out the transportation categories, core factory goods orders rose 0.4%. As for capital goods activity, which reflects current (shipments) and future (orders) business spending on equipment, the report showed more modest gains than initial estimates had indicated. Core capital goods orders, which removes transportation and defense activity, rose 0.2% in June, down from the initial 0.6% estimate. Shipments of the same were up 0.7%, slightly weaker than 1.0% originally projected. Those revisions should have slightly negative implications for current- and previous-quarter GDP estimates.