The Market Today

Hurricane Effect Fades in Jobless Claims Data but Still Expected to Impact Tomorrow’s Payroll Report

by Craig Dismuke, Dudley Carter

Today’s Calendar – Initial Jobless Claims Continue to Improve as the Hurricane Effect Fades: Initial jobless claims eased to 260k in the week ended September 30, down from 272k the week before. The result was better than the 265k expected and helped lower the 4-week average by 9,500 to 268,250. Initial claims for those states hit the hardest by Hurricanes Harvey and Irma eased last week. On a non-seasonally adjusted basis, claims in Florida, Georgia, and Texas dropped a combined 9k. Continuing claims ticked up 2k the week before but the total 1.938MM people on unemployment insurance rolls was better than the 1.950MM expected. The data reflects a continuation of the return to normalcy, but the after-effects of the storms on U.S. employment could continue to affect the data in the coming weeks and months. For example, economists expect just 80k jobs will be reported in tomorrow’s nonfarm payroll report for September.


Later this morning, August’s Factory Orders Report is expected to show a rebound from the transportation-related weakness in July. A 19.6% drop in transportation orders in July helped pull headline orders down 3.3%. Overall orders are expected to be up 1.0% in August, partially due to the preliminary 1.7% estimated increase in durable goods orders reported last week. The factory orders report will fine tune those preliminary figures. Important to watch will be any revisions to the capital goods data, a key leading indicator of business investment in equipment. The earlier report showed a continuation of the strength we’ve seen in capital goods activity in 3Q.


Four Fedspeakers will make comments throughout the day, two of which have a vote on policy this year and one that has a vote in 2018. Chronologically, we will hear from Governor Powell (2017 voter), San Francisco President Williams (2018 voter), Philadelphia President Harker (2017 voter), and Kansas City President George (2019 voter).


Overnight Activity – Treasury Yields Hold Steady Despite Falling Yields in Europe After Strong Auction Demand: It has been another mixed session for global equities Thursday but sovereign yields, especially longer maturities, are almost exclusively lower outside of the U.S. Sovereign yields had inched higher heading into European trading but made an about-face around 3 a.m. CT. The reversal followed reports of strong demand in key auctions of sovereign debts of several European countries. Looking at those moves, the U.K. 10-year yield is down 3.5 bps and notes with similar maturities in France and Germany were lower in yield by 3.7 bps and 2.4 bps, respectively. Bigger moves were made in debts of European peripherals with Italy’s 10-year note down 5.2 bps and lagging only the 5.6 bps drop in Spain’s 10-year yield. This was the first decline for Spanish yields this week after uncertainty swirled surrounding the situation in Catalonia. Also noteworthy in Europe, the minutes from the ECB’s September meeting showed the committee began discussions of how to recalibrate its QE program. They discussed “general trade-offs inherent in various scenarios for the future recalibration of the APP” but “it was also argued that the monetary policy stance would remain highly accommodative in either scenario.” European yields are near their lows of the day as is the Euro. The currency’s strength was cited as a source of uncertainty. In the U.S., equity futures are up again indicating October’s strength may continue at the open. Treasury yields are little changed and the Dollar has recovered.


Yesterday’s Trading Activity – Quiet Day Leaves Treasury Yields Unchanged as Stocks Inch to New Record Close: The S&P gained for a seventh session with its modest 0.12% daily gain enough to outperform the Dow and Nasdaq and notch the index another record close. The Dow gained a marginal 0.09% and the Nasdaq improved by an even smaller 0.04%; both managed record closes of their own. At the sector level, financial companies were the S&P’s worst performers. Financials fell 0.32%, the first decline in six days and just the fifth move lower in the last 19 sessions. Shares of financial companies were a major beneficiary of the nearly 30 bp increase in the 10-year yield since September 7. Over that period, the sector had gained 9.8% through Tuesday. As to rates, the September snapback has eased so far in October and the Treasury curve ended Wednesday essentially unchanged. There was, however, a bit of intraday volatility with an overnight bid for quality giving way to a brief spike after the stronger-than-expected ISM report that slowly faded for the remainder of the session. The 2-year yield was flat at 1.47% while the 10-year yield dropped just 0.2 bp but still rounded to 2.32%. U.S. crude prices fell 1.0% and matched their lowest level since September 13. As expected, government data showed a drawdown of U.S. crude stocks and a build for gasoline. However, it was the record exports and increased production that likely weighed on prices.


Yellen Avoids Policy, Shows Support for Community Bank Regulatory Relief: Fed Chair Yellen appeared before a group of community bankers in St. Louis on Wednesday but made no comments on the economy or monetary policy. Instead, she used the opportunity to show her support for improving the regulatory environment that community bankers face. Yellen said, “For community banks, which by and large avoided the risky business practices that contributed to the financial crisis, we have been focused on making sure that much-needed improvements to regulation and supervision since the crisis are appropriate and not unduly burdensome.”


Randal Quarles Up for Final Vote: The Senate voted 62-33 to advance Randal Quarles’s nomination to join the Federal Reserve Board. The final vote is set for this morning. Quarles was nominated to become the Vice Chair for Supervision and, assuming he is confirmed, would fill one of the three current vacancies on the Board of Governors. Quarles worked as a Treasury Department official during President George W. Bush’s time in office before leaving for a life in private equity.


ISM Services Sector Impacted by Hurricanes: The ISM’s Non-manufacturing PMI for the month of September hit its highest level since August 2005. As was the case in the manufacturing survey, the time it took suppliers to make deliveries was disrupted by the recent Hurricanes which pushed the supplier deliveries index to its highest level in decades. However, subtracting the effect of that increase the headline index would have printed a still-strong 57.9 (best since October 2015); business activity picked up, new orders jumped, and the employment index improved, but only marginally so. The underlying strength in those key metrics indicates a strong September for the U.S. services sector.

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