The Market Today

Jobs Recovery Slows


by Craig Dismuke, Dudley Carter

CORONAVIRUS UPDATE

VS Coronavirus Chartbook (PDF) (Link)

Monitoring the Virus Headlines: The push for the next stimulus plan remained front and center of the daily virus headlines. Republican Senator Perdue said talks could last for a couple of more weeks prior to Senator Schumer indicating that the two sides had begun to address divided priorities and had taken some small steps forward. White House adviser Kudlow also noted “some progress” had been made while Senator McConnell cautioned that we was unlikely to whip up complete support among his fellow Republicans. The Senate Majority Leader said he would support what he knows will be a “negotiated settlement” even if he has “some problems with certain parts of it.” White House Chief of Staff Meadows said the administration was ready to offer some compromise proposals to Democrats in an afternoon meeting.


TODAY’S CALENDAR

ADP Report Shows Slowing Progress in Jobs Recovery: The ADP’s July report on private payroll growth shows a material deceleration in the pace of recovery.  June’s payroll tally was revised up from 2.37mm to 4.31mm, now closer to the BLS’s report citing 4.77mm payrolls added.  However, ADP shows only 167k private payrolls added in July, well below estimates for 1.20mm new jobs.  The weakness was broad-based across sectors.  After reporting 19.7mm lost payrolls in March and April, ADP now shows just 7.55mm of those as having been recovered.  The majority of economic data have shown the recovery losing steam, in part the result of an acceleration in virus cases and the subsequent slowing of re-openings. Unfortunately, the slowing is occurring while there remains a lot of lost economic grounds.

Trade Volume Improves and Monthly Deficit Declines in June: As implied in the advance goods trade data, the overall trade deficit shrunk $4.1 billion to $50.7 billion.  For the second month in a row, overall trade volumes increased.  Imports rose 4.7% while exports climbed 9.4%.  Since the beginning of 2019, trade volumes have declined with imports down 19.4% and exports down 24.7%, the majority of the decline occurring during the COVID-19 pandemic.

Key Services PMIs to Show More Evidence of Slowing Recovery: At 8:45 a.m. CT, the Markit Services and Composite PMIs are expected to show no improvement in their July revision.  At 9:00 a.m., the ISM Non-Manufacturing Index is expected to show the pace of improvement slow, declining from 57.1 to 55.0.


YESTERDAY’S TRADING

Stocks Posted Sanguine Gains as Stimulus Deal Remains Elusive: It was an unusual day on Wall Street as the Nasdaq and gold set record highs while the 10-year Treasury yield fell to a new all-time low. Stocks posted modest gains after the S&P 500 withstood a bout of selling at the open and just after lunch, with the index riding an energy-led recovery to a 0.4% daily gain. While other markets largely dismissed the breaking headlines and incredible videos posted to social media, a devastating explosion at a port in Beirut kept oil prices higher on the day. The afternoon volatility loosely lined up with conflicting comments from individuals from both parties related to the pace progress on a stimulus agreement.

Gold and Treasurys Showed More Caution with Record Closes: While equities sanguinely climbed back from their afternoon stumble to close near the highs of the day, other markets appeared more perturbed by the stubbornly-slow stimulus negotiations that clouded an already-uncertain outlook. Gold broke through $2,000 per ounce for the first time and Treasury yields pushed deeper into uncharted waters. The 2-year yield inched 0.2 bps lower to 0.107% and near its record low. The 5-year yield dipped 2.8 bps to 0.19% and the 10-year yield settled down 4.7 bps to 0.507%, both closing at the lowest levels ever recorded.


OVERNIGHT TRADING

Global Stocks Rise as PMIs Show Services Expansion Continued in July: Treasury yields recoiled from yesterday’s record low levels as global stocks pushed higher overnight and gold continued its dizzying run to all-time highs. Unlike the manufacturing report from earlier in the week, China’s services PMI survey from Caixin showed some unexpected moderation in the pace of recovery in July. Still, the drop from 58.4 to 54.1 left the index comfortably within expansionary territory. In the Eurozone, the previous flash estimate for Markit’s services PMI was notched down a few tenths, from 55.1 to 54.7, but the overall messaging of continued recovery was unchanged. July’s reading represented a 6.4-point gain from June, a 42.7-point recovery from April’s low, and signaled the broadest improvement since June of 2018.

Treasury Yields Stick Higher After Disappointing ADP Record Refunding Announcement: With equities up across most of Asia and all of Europe, U.S. futures had strengthened before the ADP report. Contracts on the Nasdaq had inched up 0.2% while those tracking the S&P 500 gained 0.5%. The Dow was outpacing both with a 0.7% gain, helped out by a roughly 7% pre-market surge in shares of Disney after the Company’s earnings report yesterday afternoon beat expectations. Treasury yields had climbed steadily into the ADP report and, after brief knee-jerk volatility, remained higher despite the disappointment. At 7:30 a.m. CT, the 2-year yield had risen 0.4 bps to 0.11% while the 10-year yield had added 3.1 bps to 0.54%. Shortly after the ADP results were released, the Treasury announced it would auction a record amount of a longer debt next week, reflecting the significant borrowing needs amid the pandemic. The $112 billion auctioned next week ($48B 3s, $38B 10s, and $26B 30s) represents a $16-billion increase from the prior quarter which was $12 billion higher than the quarter before.


NOTEWORTHY NEWS

Treasury to Extend Borrowings: According to a Bloomberg report, Treasury announced an expansion of longer-term debt issuance in coming months.  According to the report, “after depending mainly on shorter-dated bills to fund the federal government’s record spending surge to address the COVID-19 crisis…. it will issue a record $112 billion of securities at next week’s so-called quarterly refunding of maturing Treasuries. Over the three months through October, it will ramp up ‘nominal coupon issuance’ by a total of $132 billion compared with the previous quarter.”

Factory Orders Rose More than Expected in June: The June Factory Orders report showed a larger-than-expected gain in overall orders with offsetting, marginal revisions to initial estimates of business spending on equipment. Total orders rose 6.2% in June, more than the 5.0% gain expected, and 4.4% when the strong month for autos, already reported in last week’s initial durable goods estimates, is excluded. The 27.8% surge in autos offset a drop in defense aircraft orders to boost overall transportation orders by 20.2%. The small revisions to the capital goods data showed orders up 3.4% instead of the 3.3% initial estimate while shipments rose 3.3% instead of the 3.4% previously predicted.


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