The Market Today
Markets Take a Breather After Three Days of Brisk Activity
by Craig Dismuke, Dudley Carter
Overall Mortgage Applications Essentially Flat: Mortgage applications were essentially flat last week as a recovery in refinancing activity offset a slowdown in paperwork for new purchases. Interest in refinancing rose 1.8% while purchase applications pulled back 2.5% as the MBA’s 30-year contract rate crept down from 4.05% to 3.98%, the first decline in a month.
Productivity Ticks Down for the First Time since 2015: Not surprisingly, productivity pulled back in 3Q following the downshift in economic growth in last week’s GDP report, resulting in upward pressure on the cost of every dollar of output. However, the degree of the slowdown was more severe than expected. Productivity slowed at a 0.3%-annualized rate last quarter, worse than the 0.9% gain expected and the first negative productivity print since 2015. As a result, unit labor costs jumped 3.6%, more than the 2.2% expected increase. Looking back to the beginning of 2010, productivity has averaged a meager 1.0% annualized rate, a key factor blamed for the weak pace of recovery in economic activity and wage growth. Combined with the continued tightening of the labor market, and averaging through the quarterly ups and downs, unit labor costs have been trending slightly higher since 2016.
Fedspeakers on the Schedule: There are a couple of Fed speakers scheduled for later in the day, with New York Fed President Williams likely to make more headlines considering his position as a perennial policy voter. Williams will participate in a panel discussion at 8:30 a.m. CT. Philadelphia President Harker, who will rotate onto the voter roll after the December meeting, will speak later at 2:15 p.m. Already this morning, current voter Evans from the Chicago Fed said that policy is probably not that far from neutral, but is “definitely accommodative” after the third consecutive rate cut at last week’s meeting.
Stocks Closed Mixed after Synchronized Records: Stocks closed mixed Tuesday following a synchronized set of records the day before, and Treasury yields extended their recent trek higher for a third session. The S&P 500 opened stronger after pre-market reports indicated that the U.S. was considering rolling back some tariffs as part of the first phase of a trade deal. The same reports cited sources who also said an agreement could be signed within the next several weeks. The S&P 500 spiked higher at 9 a.m. CT after the ISM’s non-manufacturing index rose more than expected, but the gains quickly reversed and the index floundered to a modest 0.1% daily decline. The Dow and Nasdaq both fared better, inching higher to eke out new record closes.
Yields Rose for a Third Session: Looking elsewhere, the sector shifts within the S&P 500 narrated the moved across the other major asset classes. Energy companies were the top performers as crude prices rose more than 1% to six-week highs. Financials finished in the second spot as Treasury yields added to overnight gains following the ISM beat. The move up in rates also helped explain the utilities and real estate sectors slipping to the bottom of the sector ladder. With the Fed on hold, any good news, such as the stronger-than-expected ISM report, is likely to have a steepening effect on the Treasury curve. That was true Tuesday, as the 2-year yield rose 4.2 bps, half of the 10-year yield’s 8.1-bp gain. Over the last three sessions, the 2-year yield is up 10.1 bps to 1.63% while the 10-year yield has added 16.7 bps to 1.86%, the highest since September 13.
Markets Take a Breather after Three Days of Brisk Activity: Markets took a breather on Wednesday following sharp moves over the last three days in response to signs of progress toward a phase one trade deal. Equities were little changed across Asia despite a drag from the Chinese indices, and Europe’s Stoxx 600 was less than 0.2% north of breakeven for the day. U.S. equity futures had moved in and out of positive territory during overnight trading but were 0.1% stronger just before 8 a.m. CT. European sovereign yields were moving in both directions while Treasury yields had pulled back around 3 bps after three consecutive moves higher.
Europe Receives a Recently-Hard-to-Find Piece of Good Economic News: In addition to hopes for some relief from trade tensions, several top economic reports have stabilized in recent weeks. U.S. hiring was stronger than expected in October and yesterday’s services PMI recovered more than anticipated (more below). Data released Wednesday showed Germany’s factory orders rose more than estimated after two months of declines, posting the second best monthly gain of the year. A separate report from Markit included positive revisions to German PMIs that nudged up the final Eurozone-wide readings; the composite index was revised from 50.2 to 50.6.
Recent Uptick in Optimism Has Had Notable Impact on Global Markets: The recent improvement in sentiment has lifted U.S. equities to new records and pushed Treasury yields up near multi-month highs, but has also affected assets more broadly. MSCI’s All-World Equity index, excluding the U.S., hit its highest mark since September 2018 on Tuesday. France’s 10-year yield briefly broke above 0.00% overnight for the first time since July. China’s yuan strengthened back below 7 per dollar overnight first the first time since early August. Bloomberg’s commodity index has risen to its highest level since April. And gold prices are flirting with three-month lows.
ISM’s Non-manufacturing Index Recovered More than Expected in October: The ISM’s Non-manufacturing Index rose more than expected in October, offering a welcomed break from the choppy downtrend that had pulled the index from its cycle-high in September 2018 to a three-year low in September 2019. The headline index, which measures sentiment across the U.S. services sector, rose 2.1 points in October to 54.7, better than the 53.5 economists had expected. Encouragingly, the strength was driven by improvement in each of the four key underlying indices – production, new orders, employment, and supplier delivery times – that drive the top-line index. Notably, the employment index pushed off of a five-and-a-half-year low, consistent with strength in last week’s nonfarm payroll report. While each of the indices remain near their lowest levels since 2016, and well below much stronger levels from 2018, the broad improvement will further add to optimism that the U.S. economy has continued to weather elevated uncertainties somewhat resiliently.
JOLTS Data Showed Openings Continued Soft Descent: The September JOLTS report continued to reflect a slowdown in job openings and softer tone across most of the other key metrics. Total job openings fell 277k in September from a stronger-than-estimated level in August (revised up 250k to 7.301MM), dropping the openings rate from 4.6% to 4.4%, the lowest level since February 2018. The recent softening in the openings trends has pulled the overall level down 5% from a year ago, the second weakest rate of the cycle. In other metrics, hires held up well but quits cooled and layoffs rose to their highest level since May 2012. The uptick in layoffs stands in contrast to initial claims figures which, in data through late October, have remained low.
Fed Officials Like the Current Policy Range: Dallas Fed President Kaplan said he “feels better” about policy after the recent mid-cycle adjustments and believes a 2020 recession is “unlikely.” Kaplan, who votes on policy in 2020, said “now that we’ve got a 10-year in the 180s and a 2-year in the 160s — much more in line with the fed funds rate — I think it again reinforces to me that we’ve probably got an appropriate setting of the Fed funds rate now.” Separately, Richmond Fed President Barkin agreed, noting “I don’t see [a recession as] being imminent,” while acknowledging that risks remain tilted to the downside. He said, “The FOMC’s decision to lower rates doesn’t mean a recession is imminent. But it does reflect the fact that there is a lot of uncertainty about the outlook, particularly with respect to global growth and…trade.” He added that the Fed’s about-face should provide “powerful support for our economy.”