The Market Today
Fed Sees No Concerns, September Teed Up; BOE Hikes; More Trade Concerns
by Craig Dismuke, Dudley Carter
Jobless Claims Cap Strong July: Initial jobless claims for the week ending July 28 rose 1k to 218k, the highest reading for initial unemployment insurance claims in July. For perspective, while it was the highest reading in July, it would have also been tied for the fourth lowest reading since 1969. Clearly, July was a standout month. The 4-week moving average fell to 214.5k, the second lowest reading of the cycle. At 9:00 a.m. CT, the June Factory Orders report is expected to show a strong month for manufactured goods orders. Additionally, June’s Durable Goods Orders report, which showed a solid start to 3Q business investment in the initial read, will be revised.
Market Focus – Central Bank Decisions, Trade Rhetoric, and Tomorrow’s Jobs Data: With a fairly quiet day for the U.S. calendar, markets will continue digesting the BoJ, Fed, and BOE decisions along with the escalation of tariff threats between the U.S. and China. Tomorrow’s July jobs report looks poised to be strong, once again. Leading indicators are mostly positive and the month-over-month volatility in the household report is set up to yield a drop in the unemployment rate.
Yesterday – Stocks Slipped Despite Tech Strength, U.S. Yields Hit Multi-Month Highs in Japan-Driven Global Increase: U.S. stocks were mostly weaker Wednesday despite a Facebook-led tech rally and Treasury yields moved up to their highest levels in at least two months. The Dow edged down 0.3% as Tuesday’s champ, the industrials sector, became Wednesday’s chump. After rallying 2.1% on reports the U.S. and China would re-engage in trade dialogue, the sector pulled back 1.3% after the White House said it was considering raising the proposed tariff rate on an additional $200B of imports from 10% to 25%. Industrial stocks were the second worst performers within the S&P 500, finishing narrowly ahead of the energy sector. Energy-involved companies faltered as energy commodity prices pulled back. U.S. WTI lost 1.3% to $67.85 per barrel, a two-week low, and gasoline futures fell 1.7%. U.S. crude stocks grew a larger-than-expected 3.8MM barrels. The tech sector rose 1.0% and was one of just three sectors in positive territory when trading closed. Shares of Apple led the way, rallying 5.9% to a new all-time high after a positive quarterly earnings report. Even with the notable shift up in the Treasury curve, financial companies finished flat. Treasury yields, which hardly acknowledged the minor changes to the Fed’s Statement, moved up with global yields in response to a notable jump in Japanese government bond yields. The 2-year Treasury yield closed 0.8 bps higher at 2.678% (less than 0.5 bps below its cycle high), the 5-year yield rose 2.875% (highest since May 22), and the 10-year yield added 4.7 bps to 3.006% (first time above 3.00% since May 22).
Overnight – Bank of England Hikes as Expected but Global Markets Recoil on Trade Concerns: As expected, the Bank of England raised rates for just the second time since the financial crisis. The decision, which was widely anticipated by markets, pushed the central bank’s policy rate up to 0.75%, the highest level since 2009. The official statement noted that “recent data appear to confirm that the dip in output in the first quarter was temporary,” and “the [committee] continues to judge that the UK economy currently has a very limited degree of slack.” They still believe “ongoing tightening of monetary policy” will be warranted but will likely occur “at a gradual pace and to a limited extent”, largely because of continued uncertainty around “the process of EU withdrawal.” Carney said policy “needs to walk, not run” towards neutral. While the decision was in line with expectations, UK yields fell and the pound eased, yielding to the broader global undercurrents. Global stocks were notably weaker ahead of the BoE’s announcement, responding to the trade-related decline for U.S. equities in yesterday’s session. China responded to the U.S. raising the proposed tariff rate by saying “The U.S. is playing a carrot-and-stick tactic on China, but this approach is not going to work on China.” Chinese stocks sank more than 2% to lead the weakness across Asia and are back within 1% of their previous bear-market bottom. Most indexes in Europe are off more than 1% and S&P 500 futures were down 0.5%. The flight to quality bid up global sovereigns and helped pull Treasury yields back down from yesterday’s multi-month watermark highs. The 2-year yield was down 1.2 bps while yields five years and out were down between 2.4 to 2.8 bps.
Construction Spending Falls on Weak Public Educational, Multi-Family Residential, and Non-Residential Commercial Spending: Construction spending in June disappointed expectations, falling 1.1% on a big 3.5% decline in public spending, a 0.5% decline in residential construction, and a 0.3% drop in non-residential construction. While the June data disappointed, the April and May data were revised notably higher meaning the initial 2Q GDP estimates should remain reasonably accurate. Also positive, manufacturing-sector construction rose a hearty 1.2% and home improvement spending increased 0.1%. On the negative side, commercial construction saw an unusually weak month dropping 2.2%, multi-family residential activity fell 2.8% and continued to hover around a 0.0% YoY growth rate, and public educational construction fell off a cliff (-11.0% MoM). More broadly, while the overall trends for most construction categories remain positive, the June results do point to a weaker pace of activity heading into 3Q.
ISM Manufacturing PMI Dropped to Second Lowest Level in 12 Months: The ISM’s Manufacturing PMI fell more than expected in July to 58.1, its second lowest level since July 2017, but remained solid in the broader context of the expansion. Three of the five components that comprise the headline PMI experienced a greater-than-3-point decline. The new orders index slid for a sixth month out of the last seven, shedding 3.3 points to 14-month low (May 2017). The production index fell 3.8 points to 58.5, its second lowest level over the same period. While the supplier deliveries index moderated 6.1 points from a surge in June, it remained at its third highest level since 2010 pointing to continued stress in the supply chain. The employment index edged up 0.5 points to a four-month high, consistent with the strength seen earlier in the ADP employment report. Inventory growth was the biggest positive contributor, in line with expectations for inventory replenishment to boost growth in 3Q. The other five underlying indicators, which do not directly impact the main PMI, moved lower. The ISM’s Chair summed up the respondent comment section well, saying “Demand remains robust, but the nation’s employment resources and supply chains continue to struggle. Respondents are again overwhelmingly concerned about how tariff-related activity, including reciprocal tariffs, will continue to affect their business.”
FOMC Decision – No Signs of Weakness: The FOMC voted unanimously to keep its overnight target rate range at 1.75%-2.00%. There were only minor changes to the Official Statement, presumably perfunctory changes to make the Statement more current. The only noteworthy change was the assessment of household spending which was modified from saying that activity had “picked up” to now saying it is growing “strongly”. Additionally, overall economic activity was described as being “strong”, perhaps an upgrade from June’s “solid”. There were no signs of weakness in the Statement, with every aspect of economic activity being described in positive terms. This marks the first meeting at which Kansas City Fed Bank President Esther George voted as an alternate voter. George, historically a dependable hawk, will continue voting until the San Francisco Fed Bank replaces John Williams who left to head the New York Fed Bank. This process could take months to conclude. Click here to read their Statement.
ICYMI – July Monthly Review: Longer yields flat-lined for the first three weeks of July before a couple of late-month events pushed the 10-year yield through the topside of a 9-basis point, month-long range. The biggest moves were driven by President Trump voicing his displeasure with the Fed and the BoJ tweaking its approach to “powerful monetary easing.” Trade was also a major focus and the second quarter corporate earnings season started strongly. Click here to see a more detailed review of what mattered for markets in July.