The Market Today

Markets Leverage Late-October Strength for Positive November Start


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Nonfarm Productivity Remains Mild in 3Q: Nonfarm productivity for 3Q rose 2.2%, slightly firmer than the expected 2.1% increase.  This brought the YoY rate up to 1.3%, remaining low but showing a slight bit of acceleration since 2011.  Given the modest gains in business investment over the past four years, productivity is likely to increase to near 1.5%, but remain well below what is needed to sustain a stronger-than-expected rate of economic growth (see Chart of the Day below).

 

Also released this morning, initial jobless claims for the week ending October 27 inched lower from 216k to 214k.  People filing for unemployment insurance repeatedly, continuing jobless claims, fell to a cycle-low of 1.631 million, the lowest rate since 1973.

 

Manufacturing Activity, Construction Spending, and Auto Sales: At 9:00 a.m. CT, we will see the ISM Manufacturing Index (expected to pull back from 59.8 to 59.0) and September’s construction spending data (expected to be unchanged MoM).  Throughout the day, October auto sales data will be released.  The most recent three reports on consumer confidence from the Conference Board have shown a welcomed uptick in consumers expecting to purchase automobiles over the next six months.

 

Job Indicators Point to Another Solid Labor Report Tomorrow: Despite the flurry of economic data today, investors will begin turning their attention to tomorrow’s labor reports.  While some of the leading indicators for job growth are yet to be released, the data, thus far, point to another solid month for tomorrow’s BLS data.  Job growth should remain firm based on underlying economic strength.  Moreover, there should be a bump in reported payrolls following the hurricane-related dip in September’s tally.  The household report trends set up well for a positive read on the unemployment rate.  One interesting note for tomorrow’s report, the earnings figures will be dropping off a rare decline in wage growth from October 2017 (-0.15%).  As such, any increase in October 2018 wage growth will push the YoY rate up to 3.0% or higher.  Perhaps more important than the YoY rate will be the 3M/3M ann. growth rate which has shown some acceleration over the last four months.  Bottom line, we expect payroll growth near 210k, the unemployment rate to dip to 3.65%, and average hourly earnings growth of 3.1% YoY (but for the 3M/3M ann. rate to pull back from September’s 3.4%).

 

TRADING ACTIVITY

Yesterday – Stocks Wrapped Up Scary October with Sweet Two-Day Treat: U.S. stocks rose for a second day in a row as tech shares snapped higher to lead a rotation back into cyclical sectors such as consumer discretionary and financials. The S&P 500 jumped 1.1% after a 1.6% gain on Tuesday, combining for the second best back-to-back sessions since June 2016. The three most defensive sectors, however – consumer staples, utilities, and real estate – all closed lower. Despite a positive final two sessions, October was a frightful month for equity investors. The S&P 500 dropped 6.9% in its worst monthly performance since September 2011. Only two sectors, consumer staples and utilities, notched monthly gains while the more cyclical companies declined sharply. The Dow fell 5.1%, the most since January 2016. The Nasdaq, buffeted by a reassessment of tech company valuations, plunged 9.2%, the most since November 2008. Bloomberg’s world market capitalization index slumped more than 10%. A confluence of factors – including fears of higher rates, a too-aggressive Fed, slower global growth, and continued trade uncertainty – put a dent in sentiment during the month. However, stronger stocks on Wednesday helped push Treasury yields higher, with the 2-year yield up 1.6 bps and the 10-year yield 2.1 bps higher. And despite the monthly melee for shares of U.S. companies, Treasury yields actually rose. The 2-year yield added 4.8 bps while the 10-year yield climbed 8.2 bps. The Dollar also gained Wednesday, ending October at its highest level since June 2017. The same fears that frustrated equities punished crude prices. U.S. WTI dropped 2.0% on Wednesday to extend its monthly slump to 11.5%, the most in a month since July 2016.

 

Overnight – Late-October Improvement Trickles into November’s First Day of Trading: Global markets have extended late-October’s risk-on tone into the first trading day of November. Stocks were mostly stronger overnight which continued to push yields on safer sovereign bonds higher. Chinese stocks finished up for a third day in a row on Thursday, matching the longest consecutive string of gains since late February. Chinese President Xi became the latest official to pledge support for non-state companies in the country. In addition, after the major government PMIs slumped yesterday, a private gauge of the manufacturing sector showed more stability. The Caixin Manufacturing PMI ticked up unexpectedly from 50.0 to 50.1, breaking with the downshifts seen in other Asian PMIs earlier in the session. The Stoxx Europe 600 was 0.6% higher and at a more-than-two-week high. Yields in the U.K. were up slightly with the country’s currency after the Bank of England stuck with its current policy settings and said it still expects “gradual” and “limited” rate increases over the next several years. The Bank described mixed results from consumers (good) and businesses (bad) and listed risks to the outlook from tighter financial conditions, a slower EU, protectionism, and, most acutely, Brexit. However, they also said they believe the output gap is closed, which is being credited with the initial hawkish knee-jerk reaction. In the U.S., the Dollar has pulled back the most since June after ending yesterday at an 18-month high. Dow futures are leading the majors with a 0.4% gain early and Treasury yields are mixed. The 2-year yield is unchanged at 2.87% while the 10-year yield has risen 1.3 bps to 3.16%.

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