The Market Today

TODAY’S CALENDAR

ADP Projects Slightly Weaker Job Growth in Lead-up to Tomorrow’s BLS Data: As the markets prepare for tomorrow’s June labor reports, this morning’s calendar brought the ADP Employment report which projected 177k private payrolls added for the month.  The release was slightly weaker than the expected 190k and the 12-month average of 188k.  Regardless, the ADP data continues to point to more-than-sustainable growth in jobs and an ever-tightening labor market.  June’s report showed strength in service-sector job growth, particularly in education and health services and leisure and hospitality.  Weaker than normal were the construction, manufacturing, and professional and business services sectors.

 

At 9:00 a.m. CT, the ISM Non-Manufacturing Index is expected to show a slight pullback, but remain very strong.  This comes on the heels of Tuesday’s manufacturing report which showed hard evidence of a tightening labor market in the form of supplier delays.

 

FOMC Minutes – Neutral Rate, Forward Guidance, and IOER: At 1:00 p.m. CT, the June FOMC Meeting Minutes are scheduled for release. Of interest will be the discussions on the neutral rate, what forward guidance looks like in the future, and the details of the discussion on the IOER.  The neutral rate continues to be an evolving projection but the center of the Committee continues to believe it will be just below 3.0%.  There are likely to be divergent views on this and this decision can have a meaningful impact on interest rates (particularly longer maturities).  Fed Chair Powell already announced that all meetings beginning in 2019 will be accompanied by a press conference, likely giving the FOMC more flexibility in changing policy at any meeting rather than the now-existing consensus that changes will only be made at press-conference meetings (four per year).  He has also said that the Fed might need to scale back their forward guidance in the future.  If this means getting rid of the dot plot, it would be one more step in normalizing policy.

 

TRADING ACTIVITY

Overnight – U.S. Stocks Stronger than Great Britain’s FTSE 100 Day after Independence Day Holiday: U.S. equity futures were higher overnight and Treasury yields had moved up between 2.5 and 3 bps across most of the curve ahead of a handful of important U.S. economic reports. Asian indexes remained on their back foot and the bear market in China deepened amid ongoing concerns around the U.S. and China potentially moving forward with a first round of tariffs on Friday. But European stocks have moved sharply in the opposite direction with all major mainland national indexes up over 1% and the Stoxx Europe 600 0.8% higher. European automakers were up nearly 4% and leading the rise after a German newspaper reported that the U.S. administration was planning to hold talks with the EU aimed at eliminating all tariffs on cars sold between the two. That would ease some concerns of another U.S.-involved trade battle that arose when President Trump said on June 22 that the administration was considering a 20% tariff on cars brought in from the EU. The rally in U.S. and European risk assets has helped drive sovereign yields higher. The 10-year point on most European yield curves was just over 2 bps higher while the 10-year Treasury yield had moved up 3.1 bps. The 2-year yield was 2.4 bps higher.

 

Tuesday’s Trading – Stock Reversal Sent Treasury Curve to New Cycle Low: Stocks bucked the global trend in an abbreviated Tuesday session, erasing an early jump and pulling back to close near the lows of the day. Asian equities had recovered from an opening slump and European markets had strengthened. The S&P 500, however, peaked in the first thirty minutes of trading at up 0.3% and slipped from there to close down 0.5%. Technology companies underperformed with S&P 500 sector down 1.4% and the Nasdaq notching a day’s-worst 0.9% retreat. Underneath the S&P 500’s broader decline, there were some silver linings. More sectors rose than fell and 45% of individual companies gained. Energy companies were bright spot despite intraday volatility for oil prices. West Texas crude broke above $75 per barrel for the first time since November 2014, but quickly sold off more than 3% from the highs. They ultimately ended unchanged. Treasury yields tracked equities, rising overnight and recoiling during the U.S. session. The curve made new lows in the extra hour SIFMA offered bond investors after the NYSE shut down equity trading. The 2-year yield ended down 2.4 bps at 2.52% as the 10-year yield dropped an even 4 bps to 2.83%. The spread between briefly broke to as low as 0.297% before edging back up to 0.301%.