The Market Today
Hurricanes Cast Shadow of a Doubt Over Economic Reports
by Craig Dismuke, Dudley Carter
Today’s Calendar – Free Fallin’ Auto Sales Expected to Rebound on Harvey: Today’s calendar is fairly quiet with September’s vehicle sales as the only report on the schedule. Sales are expected to show a big, 1.08 million (units annualized) jump from August’s disappointing report affected, once again, by Hurricane Harvey. If economists’ estimates are correct, it would mark the biggest percentage gain since March 2014. Industry analysts have estimated that 500k autos in Texas were flooded by Harvey. Sales are likely to jump even more in subsequent months, temporarily reversing an eight-month, 11% decline in auto sales.
Fed Governor Powell will speak today on regulatory reform and financial institutions are likely to pay attention to his comments. As one of the handful of people being considered for the Fed Chair position, Powell could be in a critical role for financial regulation efforts going forward. Odds currently favor former Fed Governor Kevin Warsh with current Chair Yellen and Governor Powell in the top three.
Overnight Activity – Catalans Runnin’ Down a Dream Sending Sovereign Yields Higher; Stocks Steady and the Euro Recovers: European sovereign yields are up across the region Tuesday which has helped pressure the U.S. Treasury curve higher. The 10-year yields in Germany, France, the U.K., and Spain are up 3.8 bps, 3.7 bps, 5.4 bps, and 4.8 bps, respectively. Moves in Treasury yields have been more modest with the 2-year yield unchanged from Monday (1.48%), the 5-year yield 0.8 bps higher (1.94%), and the 10-year yield adding 1.6 bps (2.36%). The weekend ruckus surrounding the independence referendum in Catalonia has continued to weigh on Spanish stocks with the IBEX 35 currently off 0.65%. The index has declined 1.87% this week. Elsewhere in Europe, stocks are mixed following a strong start in Asia. U.S. equity futures are marginally stronger indicating momentum from yesterday’s record-setting performance could push the major indices higher at the opening bell. Monday’s dip for the Euro, which was also likely related to the weekend referendum activity in Spain, deepened overnight sending the currency to its weakest level against the Dollar since August 17. However, it has since recovered helping erase another rise for the Dollar. The British Pound weakened for a second day on another weaker-than-expected PMI report.
Yesterday’s Trading Activity – U.S. Equities Already Learned to Fly, Treasury Curve Essentially Flat as the Dollar Follows Stocks Higher: Treasury yields gave up an overnight rise ahead of the U.S. session and did very little for the remainder of the day. After rising to as high as 2.37% overnight, the 10-year yield fell back to nearly unchanged on the day, up just 0.4 bps to 2.34%. The 2-year yield was unchanged at 1.38% while the 5-year yield dropped only 0.3 bps to 1.93%. The Dollar had moved to higher overnight and added to those gains during U.S. trading. It’s biggest gains came against the Euro (dinged by uncertainty following the tumultuous Catalonia referendum over the weekend) and the British Pound (disappointing data, persistent uncertainty surrounding the Brexit negotiations, and concerns about the stability of PM May’s support). But the most reported market move was the rally that sent U.S. stocks to another round of record highs. The Dow added over 150 points, or 0.68%, to lead the big three indices. The S&P gained 0.39% and the Nasdaq trailed with a 0.32% daily improvement. Materials companies led all sectors on both the Dow and S&P after the ISM report printed stronger than expected (more below). The stronger Dollar was bad news for the commodities space where energy underperformed metals and agriculture. U.S. crude prices fell the most since September 8 after OPEC production data showed an unexpected increase in September.
Hurricane Effect Felt in ISM Report That Won’t Back Down: The ISM Manufacturing index rose two points in September to 60.8, its highest level in more than 13 years. The recent hurricanes were blamed for two of the biggest shifts in the underlying indices, one of which helped lift the headline to its more-than-a-decade high. The index tracking the speed of supplier deliveries spiked (indicating a bigger delay in delivery times) to its highest level in more than 13 years, with respondents pointing a finger at disruptions from Hurricanes Harvey and Irma. This helped raise the headline which tracks five of the subindices: new orders, production, employment, supplier deliveries, and inventories. Also affected, the prices paid index jumped to its highest level in six years. Many respondents cited the storms as two forces driving prices in certain sectors higher and raising the uncertainty about future increases. While the data may have been skewed somewhat by the impacts of these weather events, the underlying trend in the index has generally been positive since the start of 2016 and there were signs of this strength continuing. New orders, production, and employment were among the other key subindices to improve in September.