The Market Today
Markets Optimistic U.S. – Iranian Tensions Can Now De-Escalate
by Craig Dismuke, Dudley Carter
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Anomalous Jump in Trade, Transportation, and Utilities Payrolls Masks Broader Weakness in December ADP Payroll Report: The December report on private payroll gains from ADP showed a stronger-than-expected 202k payrolls added during the month but the headline figure skewed what appears to be a fairly soft report. Construction payrolls jumped 37k, above the 12-month average rate of 14k, as construction activity continues to appear robust. Possibly skewing the report; trade, transportation, and utilities payrolls rose 78k; well above the 17k average over the last year and the largest monthly gain since 2005. The sector was likely influenced by temporary gains in retail or transportation hires to cover the holiday sales season. This does not appear to be a sustainable increase. Excluding the strength in construction and anomalous jump in the trade, transportation, and utilities sector; the report is fairly weak. The manufacturing sector lost over 7k jobs as foreshadowed by the weak ISM manufacturing employment index. This was the worst month for manufacturing payrolls in the ADP report since 2016 and fourth worst month of the cycle. The information sector lost 14k jobs, its second-largest loss of the cycle. The leisure and hospitality sector lost 21k jobs, its worst month of the cycle.
Mortgage Applications Come Back to Life after Holiday Hiatus: After three weeks of declining mortgage applications, new apps jumped 13.5% according to the MBA report for the week ending January 3. The increase included a 3.0% gain in purchase apps and a 24.6% jump in refi apps. Mortgage rates declined during the observation week with the 30-year rate down 4 bps to 3.91% and the 5-year ARM rate down 8 bps to 3.19%. Going forward, housing activity continues to strengthen but remains contingent on rates remaining low.
Stocks Slipped Despite Daily Global Recovery: U.S. stocks slipped Tuesday despite an improvement in markets elsewhere that had pushed equities up across Asia and Europe earlier in the day. The S&P 500 dipped 0.3% as all 11 sectors pulled back, unwinding most of Monday’s recovery. The Dow dropped a slightly-larger 0.4% while the Nasdaq outperformed with a marginal loss that left the index nearly unchanged. In the absence of further escalation, stocks had recovered Monday from last week’s sell-off that was sparked by rising geopolitical tensions in the Middle East.
Treasury Yields Remained Stable Amid the Uncertainty: While the war of words has been the only thing to persist into this week, uncertainty around the U.S.-Iran situation remains high. Several thousand U.S. soldiers began their journey to the Middle East and a top Iranian leader said even the most subdued of the “revenge scenarios” would be a “historic nightmare” for the U.S. Still, Treasury yields were little changed on the day with the 2-year yield edging 0.4 bps lower to 1.54% while the 10-year yield ticked 0.9 bps higher to 1.82%. In other markets, crude prices retreated around 1% despite the continued uncertainty while gold reached another new high back to the middle of 2013.
Markets Take a Wild Ride After Iran Targets U.S. Troops in Iraq: The market’s respite from worries of Iranian retaliation proved short-lived after the country launched more than a dozen ballistic missiles at military bases hosting U.S. forces in Iraq. The attacks, a response to the U.S. killing a top Iranian commander last Thursday, created another textbook risk-off response from global investors around 4:30 p.m. CT Tuesday. Stock futures sold off sharply as the news broke, crude oil rallied with gold, and Treasury yields shot lower.
Initial Fears Fade on Lack of U.S. Casualties, Hopes for Pause in the Conflict: Much of those moves were pared, however, as further details emerged. Iran’s Foreign Minister tweeted the country “took & concluded proportionate measures” and did “not seek escalation or war.” There were no reported American casualties in the limited attacks, leading President Trump to tweet “All is well!”. Iran’s response was more limited than initially feared, increasing the possibility that a more involved military conflict could be avoided for now. After dropping more than 1.7% in the knee-jerk reaction, S&P 500 contracts recovered and were 0.2% higher at 7 a.m. CT. The 10-year yield fell more than 11 bps to 1.70% before climbing back above 1.81% to nearly unchanged for the day. U.S. WTI fully erased a more-than-4% gain and was 1% lower, while gold gave up a 2.3% gain and was unchanged.
Yields Show Modest Response to Strong ADP Amid Uncertainties: Away from the geopolitical developments, German factory orders fell sharply and unexpectedly in November while economic confidence in the broader currency bloc inched up again in December after hitting a four-year low in October. Ahead of this morning’s U.S. private payroll data, the Treasury curve was essentially flat from the prior day’s close. Yields moved only modestly higher after the stronger-than-expected result, with the 10-year yield up 0.9 bps at 7:30 a.m. CT.
ISM Services Survey Perked Up More than Expected Despite Drop in New Orders: Activity across the U.S. services sector expanded at a faster-than-expected rate to close out 2019 according to the ISM’s Non-manufacturing report for December. The ISM’s Non-manufacturing PMI rose from 53.9 to a four-month high of 55.0 last month, surpassing the median economist’s forecast of 54.5. The key details of the report painted more of a mixed picture, however, as most of the monthly improvement was accounted for by a 5.6-point increase in current activity to a four-month high; there were smaller gains for the supplier deliveries and inventories indexes. Disappointingly, the new orders index fell 2.2 points to a three-month low and the employment index edged back 0.3 points. Despite the mixed messaging, the improvement offers some consolation after the related manufacturing index dropped unexpectedly last week to a new cycle-low. It also shows that while trade tensions have weighed on the economy broadly, the more important services sector has held up better amid the uncertainty.
Aircraft Dragged Factory Orders Lower While Business Spending Indications Changed Little in Revisions: November’s decline in factory orders was slightly less than expected, -0.7% versus estimates of -0.8%, but most of the change was offset by November’s 0.3% gain being trimmed to 0.2%. Excluding the effect of a sharp drop in aircraft orders, non-transportation orders actually rose 0.3%. Looking at the data indicators for business investment, Tuesday’s report had only modest implications. Capital goods orders rose 0.2% instead of 0.1% as initially estimated, while shipments 0.3% estimated decline was unchanged in revision. Business investment continues to be a dim spot of the economic outlook amid elevated economic uncertainties.