The Market Today

Positive Trade Headlines, Less Bad News from Brexit, and Weaker Job Growth from ADP Data


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

ISM Non-Manufacturing Index to Provide More Insight into Economic Stability; and Fedspeak:  At 9:00 a.m. CT, the ISM Non-Manufacturing index is expected to pull back from 59.7 to 58.0.  The index bounced to its fourth highest reading of the cycle in February, one of only a handful of positive data releases in March and the most convincing for sure.  Also on the calendar throughout the day, regional Fed bank presidents Bostic, George, Barkin, and Kashkari are all on the tape.

 

March ADP Report Shows Slowing Private Payroll Growth: The March ADP Employment report showed an estimated 129k private payrolls added, weaker than expectations for 175k.  The weaker tally resulted from a slowdown in hiring at small- to mid-sized businesses: small businesses (1-49 employees) added just 5.7k jobs, the weakest in 18 months; medium-sized businesses (50-499 employees) added 63.1k jobs, the weakest in 17 months; and, large businesses (500+ employees) added 59.8k jobs, slightly better than the 12-, 24-, and 60-month averages.  Goods-producing jobs were notably weak, subtracting 6k jobs in March versus a 12-month trend of adding 49k each month.  Service-sector job growth was also weak, rising just 135k for the month versus a 12-month trend of 169k.  Trade, transportation, and utilities jobs rose just 9k (12-month trend of +29k per month) while the leisure and hospitality sector added just 13k jobs (12-month trend of +34k).  Interestingly, ADP revised up their projection of private payroll growth in February from +183k to +197k despite the BLS report showing just 25k growth in private payrolls.  ADP’s data points to the labor market remaining more stable than the BLS data, but March’s results do show it slowing.  Nonetheless, the ADP data have a tendency of showing slightly different timing to the BLS data historically (see Chart of the Day).  As such, and considering that ADP’s results still show a 3-month average of 175k monthly payroll growth, this report is unlikely to upend market sentiment.

 

Mortgage Applications Surge As Refinancing Activity Spikes on Lower Rates: Mortgage applications jumped 18.6% last week, the second best week for activity since early January 2016. Purchase applications (+3.4%) were positive for a fourth week in a row but the primary boost came from a surge in refinance applications. Total refinancing activity jumped 38.5% last week, the second strongest week of the cycle. The MBA’s 30-year mortgage rate dropped for a fourth week in a row, down 0.09% to 4.36% last week (lowest since January 2018), the same week the 10-year Treasury yield touched a 15-month low of 2.338%. Over that four week period, purchase applications have picked up 15% while refinancing has risen more than 60%. The weekly mortgage applications data continue to reflect the rate sensitivity of the housing sector and provide hopes for home sales heading into the spring selling season.

 

TRADING ACTIVITY

Yesterday – Stocks Held Monday’s Gains, Treasury Yields Fell Back: After big upward shifts Monday in response to positive economic data from the U.S. and China, U.S. assets traded within relatively tight ranges on Tuesday. The S&P 500 swung at the open, higher then lower, before climbing gradually back to end less than 1 point changed (0.00%). Consumer staples companies closed in last place at down 0.84% with the largest drag coming from a 12.8% tumble in shares of Walgreens. The company reported 2Q earnings results that missed estimates, and announced a notable reduction in its previously released full-year guidance. Energy companies were the second worst performers, despite U.S. WTI crude climbing to its highest level since November. Real estate companies closed up 0.86% and on top, likely helped by lower rates, and the communication services sector was supported by Facebook shares reaching a seven-month high. Treasury yields had turned back overnight following Monday’s surge, the second sharpest of the year, and remained lower through Tuesday’s trading. The 2-year yield fell 3.0 bps to 2.30% while the 10-year yield dipped 2.7 bps to 2.47%.

 

Overnight – More Good News from China, Less Bad News from Brexit: Equities took a breather yesterday but resumed Monday’s trek higher overnight that was spurred by hopes the global economy is stabilizing and that the U.S. and China may be nearing a deal on trade. Chinese stocks again pulled out in front with the CSI 300 rising 1.3% and to its highest level in a year. Gains across the rest of Asia and in Europe were similarly upbeat and U.S. futures had firmed. The Stoxx Europe 600 had risen 0.6% midway through Wednesday’s session to reach its strongest level in eight months. Global sentiment improved Monday after Chinese manufacturing PMIs topped estimates. Further fueling hopes of a stabilizing global economy overnight, a sister survey covering the services sector also beat expectations at a 14-month high, helping lift the composite index to a nine-month high. Officials from China are in Washington today meeting with their U.S. counterparts to continue last week’s trade discussions. Both sides have cited progress and a report from the Financial Times Wednesday said that while a couple of key issues remain open, most others have been resolved. In addition to the upward pressure that report placed on Treasury yields, Europe’s services PMI also printed better than an expected and yields in the U.K. were higher on hopes a no-deal Brexit was becoming less likely. While the uncertainty around Brexit remains high, PM May is set to meet with the leader of the opposition later today in an attempt to reach a compromise. The U.K.’s 10-year yield was 7.1 bps higher earlier while Germany’s 10-year yield had added 5.6 bps and turned positive for the first time in nine days. Before this morning’s ADP jobs report and ISM services survey, the 2-year yield was up 3.2 bps and the 10-year yield had climbed 4.1 bps.

 

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