The Market Today
Jobs Data Shows Slowing Pace of Recovery
by Craig Dismuke, Dudley Carter
CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)
Monitoring the Virus Headlines: The growth rate of new cases in the U.S. remained stable on Tuesday, rising 0.7% to match the prior week’s average. There were also signs of continued improvement in some of the largest U.S. states. For instance, hospitalizations in Texas declined to the lowest level since late June and California reported the smallest increase in new infections since mid-June. On the medical front, Switzerland’s Roche announced its rapid test provides results in just 15 minutes and said it would seek emergency approval from the FDA for use in the U.S. U.S. advisers released a plan for how an eventual vaccine would be distributed across the U.S. population and debate about the efficacy of convalescent plasma treatment continued, with advisers from the NIH saying recent data weren’t convincing. There were also signs that negotiators from the White House and Democratic leadership were talking again, although a deal still appears to be a ways off.
ADP Employment Report Disappoints Expectations, Affirms Slower Pace of Recovery: The economy added back fewer private payrolls than expected in the first look at August’s job figures. The ADP Employment report projected a gain of 428k, shy of economists’ expectations for 1.0mm. Heading into Friday’s BLS nonfarm payroll report, economists expect to see 1.39mm payrolls added to the economy, including 1.288mm private sector payrolls. There has been a fairly significant divergence between the ADP and BLS data from May to July making the ADP report much less reliable of an indicator for Friday’s more market-influential data.
Mortgage Applications Drop Despite Lower Rates: Mortgage applications for the week ending August 28 fell 2.0% despite mortgage rates inching lower. The average 30-year mortgage rate fell from 3.11% to 3.08%, nearing the record low from four weeks prior. Purchase apps declined 0.2% and refi apps dropped 3.1%. Despite the decline, applications continue to point to solid housing activity.
Factory Orders and Business Investment: The July Factory Orders report is expected to show further recovery at 9:00 a.m. CT. Included in the data will be the final revision to capital goods orders and shipments which have shown a v-shaped recovery for business investment in equipment in previously released data.
Fed Communications: There are several Fed speakers on the tape today including New York Bank President Williams (9:00 a.m. CT), Cleveland Bank President Mester (11:00 a.m.), and San Francisco Bank President Daly (5:00 p.m.). Also today, the Fed will release its Beige Book report on economic conditions around the country in advance of its September 16 FOMC Meeting.
Stocks Climbed to Another Record: The S&P 500 and Nasdaq both set records on Tuesday and the Dow continued to make up ground lost during the pandemic. Tech companies were among the top performers, helping the Nasdaq to a day’s best 1.4% gain. The sector also sat near the top of the S&P 500, helping to nudge the broadest major index up 0.8%. The Dow also rose 0.8%. Within the S&P 500, the materials sector led all gains after the ISM’s manufacturing index beat expectations in August. Data released overnight ahead of the U.S. session showed manufacturing expanded in China and Europe as well. Tech stocks were the second-best performers, led by another gain for shares of Apple.
Longer Treasury Yields Continued to Give Back Last Week’s Post-Fed Jump: Despite those positive developments and some murmurings that top negotiators in Washington could resume talks in search of common ground for more stimulus, Treasury yields ended lower on the day. While the short-end remained stagnant, the 2-year yield actually closed flat on the day, the 30-year yield led a notable decline in longer maturities. As part of its monthly program to buy bonds, the Fed, through the New York Reserve Bank, purchased roughly $1.7B in bonds that matured after November 2040. The Long Bond lost 5.5 bps in yield to 1.42% while the 10-year yield dropped 3.6 bps to 0.67%.
Global Equities Continue Their Climb: Wall Street’s strong September start pervaded equity markets in Asia and across Europe on Wednesday. Manufacturing PMIs from all three continents on Tuesday showed activity expanded again in August, signaling the global recovery from the coronavirus pandemic has continued in recent weeks. The MSCI Asia-Pacific Index inched up 0.3% while Europe’s Stoxx 600 rallied nearly 2%. The outsized strength in European markets, however, also appeared to reflect expectations for continued central bank support. The ECB’s Chief Economist said in comments just before European equities began to trade, “The euro-dollar rate does matter,” taken by markets to mean the currency’s recent surge to a more-than-two-year high could affect the ECB’s outlook, and therefore their policy decisions.
ECB Comments Halt Euro’s Ascent, Pull Regional Yields Lower: In addition to the euro turning lower on his remarks, sovereign yields across Europe pulled back on the prospects that the central bank could take further action if the currency begins to weigh on the outlook. Concerns about the European recovery have also risen amid a new wave of infections there in recent weeks. In that regard, Germany’s retail sales fell 0.9% in July, much worse than the 0.5% gain economists expected. Germany’s 10-year yield was 3.6 bps lower on the day and lagging bigger declines in other countries. Ahead of this morning’s ADP prediction of Friday’s official private payroll tally, U.S. equity futures were solidly higher and pointing to more opening gains. The S&P 500 was 0.6% higher and just below its highs of the day. The U.S. 10-year yield had added 0.8 bps. After a knee-jerk reaction to the disappointing ADP data, those moves were generally intact.
Diffusion Indices Show Manufacturing Continued to Pick-Up in August: The ISM Manufacturing Index rose more than expected in August, up 1.8 points to a 21-month high of 56.0, as new orders spiked to lead improvement across four of the five underlying metrics that affect the headline PMI. The orders index jumped 6.1 points last month to 67.6, its strongest level since 2004. Production activity improved by a smaller 1.2 points to 63.1, its highest level since January 2018. While employment also gained, the 2.1-point improvement to 46.4 left the index in contractionary territory for a 13th consecutive report. While the degree of change has varied across those key metrics with employment lagging behind, activity across all of the aforementioned has healed each month since April. The rest of the indicators were also better on average in July and the overtones of the comment sections was positive. Separately, the Markit Manufacturing PMI for August was revised down from 53.6 to 53.1, still the best level since January 2019.
Construction Spending Finally Rises in July: Construction spending was weaker than expected in July, rising 0.1% compared with a median estimate for a 1.0% gain. However, the increase was the first since February and the impact of the monthly miss on the broader trend was partially absorbed by revisions to show smaller declines in previous months. The dynamics of the details behind the headline figure were consistent with the broader trends showing that housing’s recovery has outpaced other sectors. Helped out by solid increases in both single family and multi-family construction, private residential spending rose 2.1% after four months of weakness and despite another small decline in home improvement spending. Nonresidential spending remained weak and declined 1.0%. In the public sector, federal construction spending improved while state and local activity, an area of concern considering the hit to state tax revenues, contracted for a third time in four months.