The Market Today
Markets Shed Risk as Geopolitical Worries Rise
by Craig Dismuke, Dudley Carter
Today’s Calendar – Productivity Rebounds in 2Q but Remains Weak in a Longer-Term Perspective: In the early morning data, mortgage applications rebounded 3.0% in the week ended August 4. Refinancing applications, which were up 5.3% WoW, were largely responsible for the better result. Purchase applications improved a more modest 0.8%. Looking through the weekly noise, purchase activity has weakened recently with the four-week average having now declined in each of the last six weeks.
As expected, nonfarm productivity – output per hour of work – rebounded in 2Q as a result of the better pace of economic growth last quarter. Productivity improved from 0.1% in 1Q (revised up from 0.0%) to 0.9% in 2Q, about in line with its 0.8% trailing three-year quarterly average. However, productivity remains below the 1.2% average pace from 2007 to 2016. Weak productivity gains will continue to limit the pace of real economic growth and are one of the factors blamed for the tepid wage gains. The 2Q improvement in productivity helped slow the increase in unit labor costs. Unit labor costs rose 0.6% in 2Q, below the expected 1.1% rise; a steep upward revision to 1Q data contributed to the miss.
Later this morning, the Census Bureau will release revisions to June’s wholesale inventories and trade data. However, markets will remain focused on the ever-increasing tensions between the U.S. and North Korea (more below).
Overnight Activity – Risk Appetite Evaporates as Geopolitical Worries Intensify: Risk aversion rippled through global markets overnight as tensions between the U.S. and North Korea continued to grow. A trifecta of tempestuous events over the last two days (see Yesterday’s Trading Activity) ended the Dow’s ten-day win streak Tuesday and reinvigorated fears of a potential conflict between the two countries. Later Tuesday evening, after markets had closed and in response to a warning from U.S. President Trump (see Yesterday’s Trading Activity), North Korea issued a statement saying it was “carefully examining” a plan to attack Guam; a U.S. territory that houses multiple U.S. military bases. With the situation becoming more turbulent, global stocks moved lower as investors moved money into safer sovereign assets. Japan’s Nikkei fell 1.3% and the Stoxx Europe 600 is down 0.9%. Yields on Germany, France, and U.S. sovereign debts have moved lower. Germany’s 10-year yield is down 5.2 bps while the 10-year Treasury yield has fallen 4.8 bps to 2.21%, the lowest since late June. Other Treasury yields two years and out are down by more than 3 bps. Safe haven currencies such as the Yen and Swiss Franc have rallied with gold. U.S. equity futures are sharply lower.
Yesterday’s Trading Activity – Talks of “Fire and Fury” Enough To End the Dow’s Win Streak: The Dow’s recent record-run ended Tuesday as geopolitical tensions between the U.S. and North Korea flared. The major stocks indices reached their intraday lows just before the close and just after President Trump issued a grim warning to North Korea. The President said, “North Korea best not make any more threats to the United States. They will be met with fire and fury like the world has never seen.” The warning escalated an already tumultuous situation. Just hours before, it was reported that U.S. intelligence officials had concluded North Korea has developed missile-ready nuclear warheads. Less than a day earlier, North Korea said it “will, under no circumstances, put the nukes and ballistic rockets on the negotiating table,” and that they would “teach the US a severe lesson” should the U.S. attack. The Dow slipped 0.2% to break its ten-day win streak, which included nine new record highs. The tensions also gave gold a modest boost. Treasury yields outside of five years remained higher for the day but completely erased an early morning rise that followed the solid U.S. JOLTS report (more below). The Dollar also responded positively to the JOLTS data and was hardly impacted by the President’s comments.
June’s JOLTS Reports Shows Surprisingly Strong Job Openings: Job openings rose to a new record high in June according to the BLS’s latest JOLTS report. Openings climbed from 5.702MM (revised up 36K) to 6.163MM, the highest in records dating back to 2000. The surge in new openings sent the openings rate – openings as a percentage of openings plus total employed – climbing 0.2% to 4.0% which matched its record best. Elsewhere in the report, hiring slowed modestly with quits while the number of layoffs inched higher. However, the overall trends remain positive and continue to point to an ever-firming labor market.