The Market Today
Hurricanes Continue to Affect Economic Data; Stocks Keep Running
by Craig Dismuke, Dudley Carter
Today’s Calendar – ADP Report Shows Hurricane Impact; ISM Report Due: Somehow, economists nailed the projection for the ADP Employment report expecting 135k private payroll growth in September. Given the big volatility expected in the September data as a result of Hurricanes Irma and Harvey, the month’s labor data was expected to be difficult to predict. Nonetheless, ADP private payroll growth was reported at 135k this morning, a decent report given the storms and despite the break from recently stronger reports. The underlying data shows a clear impact from the weather. Small businesses showed an actual decline in payrolls, down 6k, while larger businesses’ payroll counts continued to expand. The biggest source of weakness, however, came in service-providing industries where payroll growth was just half its 12-month run rate. The weakest sectors were trade/transportation/utilities, education/health services, leisure/hospitality, and IT. More importantly, economists are projecting 80k nonfarm payroll growth in Friday’s BLS report. This morning’s ADP data is unlikely to affect those expectations. And just like with the ADP report, a weak BLS report on Friday will be explained away as hurricane-impacted.
At 9:00 a.m. CT, the ISM Non-Manufacturing Index is expected to remain firm, ticking up from 55.3 to 55.5.
Outgoing Fed Vice Chair Fischer spoke this morning in comments that would have normally garnered more attention. However, given his resignation and the significant rollover at the Federal Reserve over the next six months, the comments carry less weight. He appears to fall into the hawkish camp along with others like Dudley. He said he would like to see the real rate get back above zero, something he anticipates occurring in mid-2018. Translated – he expects the Fed target rate to be above the inflation rate over the next 12 months implying two to three more rate hikes by mid-’18.
Overnight Activity – Equities Trade Mixed as Risk-Off Bid Drives Treasury Yields: Global equities are mixed Wednesday, firmer in Asia and weaker in Europe, as sovereign yields around the globe remain bid. Equity weakness in Europe remains centered in Spain where the IBEX 35 fell another 2.5% on Wednesday. The waves from this past weekend’s Catalonian independence continued to ripple through markets after a leader from the region’s government said that Catalonia will declare independence from Spain by “the end of this week or early next week.” Spanish stocks are down 3.6% this week. The increased uncertainty has also driven yields in Germany and France lower and yields in peripheral Europe higher. The Spanish 10-year yield is up 5.7 bps Wednesday (+18 bps on the week) to 1.77%, the highest level since late March. The Euro, which had initially responded negatively to the uncertainty in Spain, actually improved against the Dollar. The Eurozone’s Composite PMI for September was unchanged in revisions at 56.7, up 1 point from August, but retail sales declined for a second straight month. Crude prices continued to struggle overnight after industry data reported a decline in U.S. crude inventories, but another weekly build for gasoline. Crude price have fallen in four of the last five sessions. U.S. equity futures are weaker in line with the down trade in Europe indicating a likely drop when the opening bell rings.
Yesterday’s Trading Activity – Stocks Rise to New Records, Auto Sales Surge: Treasury yields fell Tuesday despite U.S. stocks adding to Monday’s gains to reach another set of record highs. The 2-year yield fell 1.2 bps to 1.47% while maturities from 3-years to 10-years dropped just under 2 bps. The 5-year closed at 1.92% while the 10-year ended at 2.32%. In equities, the Dow led the way with a 0.37% gain while the S&P and Nasdaq added roughly 0.2%. Telecommunications improved the most within the S&P to lead the index to its sixth consecutive daily gain. Among the biggest movers on the day were the major airline and auto companies. The airlines rallied more than 5.5% after Delta reported better-than-expected revenue per seat mile flown for 3Q. Auto companies rose 2.5% after auto sales for the month of September boomed. September’s sales rose 15.2% to a total annualized pace of 18.47MM units. That represented the biggest monthly gain since August 2009 and the strongest monthly sales pace since July 2005. It was expected that consumers replacing cars destroyed by the hurricanes would boost the monthly result. Unannualized, sales were higher by roughly 200k units. Some industry analysts said more than 500k autos could have been destroyed by Harvey alone, implying another month or two of inflated sales as the replacement process continues.