The Market Today
Spanish Fracture; ISM Manufacturing and Construction Spending
by Craig Dismuke, Dudley Carter
First and foremost, our thoughts and prayers go out to all of those affected by the deadly violence in Las Vegas overnight.
Today’s Calendar – ISM Manufacturing Report Kicks off Week of Important – but Unreliable – Economic Data: After last week’s barrage of economic data and Fedspeak, this week is a bit more quiet. However, the reports this week are highly important including the ISM reports and the September labor data. We kick off this morning with the ISM Manufacturing index at 9:00 a.m. Ct. The index is at a strong level and is expected to pull back fractionally despite last week’s run of strong regional manufacturing reports. Also at 9:00 a.m., the August construction spending data will be released and is likely to show mixed results given the increase in construction heading into Hurricane Harvey, but then a drop-off immediately after the hurricane hit. Future months are likely to show an increase as rebuilding occurs but it may be several months before we see that benefit.
On Wednesday, the ISM Non-Manufacturing index is expected to tick up from 55.3 to 55.5, also remaining at a reasonably strong level. Friday’s jobs data is, however, expected to be severely affected by the recent storms. Economists expect nonfarm payroll growth to increase just 85k for the month with the unemployment rate holding at 4.4%. Average hourly earnings are expected to stick at 2.5%. However, with such a big impact coming from the storms, it will be hard to draw any definitive conclusions from this data. Moreover, it may be December before we (more importantly, the Fed) see a batch of jobs data that can be trusted to reflect the actual health of the economy.
Also on the calendar this week are several Fed speakers. However, after hearing from almost everyone last week, their comments are unlikely to move the markets, with two exceptions. First, Chair Yellen speaks on Wednesday. Second, if any speaker’s tone changes after the weaker-than-expected inflation data last week, it could elicit a market response.
Overnight Activity – Market Moves Likely to Take a Backseat in Monday’s News Cycle to Tragic Mass Shooting in Las Vegas: The overnight news cycle was dominated by reports about the deadly shooting that occurred at a country music concert late Sunday evening in Las Vegas. Current reports indicate more than 50 people have died and over 200 were injured in the deadliest mass shooting in modern U.S. history. The markets, however, have shown little lasting effect from the tragedy. Global equities were firm from the start. Multiple markets are closed in Asia but those that were open moved higher. The Stoxx Europe 600 is also up and U.S. equity futures positive. The one outlier on the equity screens is the 1.4% loss for Spanish stocks. Spanish assets were volatile Monday after a weekend independence referendum in Catalonia, where 90% of the 43% of Catalans who voted said yes to independence from Spain (more below). Spanish yields are up the most with the 10-year note up 9.9 bps to its highest level since July. Sovereign yields elsewhere are mixed with Treasury yields currently at their lows of the day and essentially unchanged from Friday. After reaching as high as 2.37% overnight, the 10-year Treasury yield has settled back at 2.33%. The Dollar bounced back to near its highest level from last week which was the highest since mid-August.
Catalan Vote Suppression Likely to Embolden Those Unhappy with European Governments: Catalans attempted to go to the polls over the weekend to vote on a referendum to secede from Spain. The region is an economic powerhouse accounting for 19% of Spain’s GDP, is a major tourism hub for Spain including cities like Barcelona, is the second largest region with 7.5 million inhabitants, and is a large exporter of goods. Catalans are also fiercely independent, still retaining their own Catalan language despite laws banning it. Spanish Prime Minister Rajoy opposed the Catalan secession and ruled the referendum illegal. Subsequently, the Spanish government sent police to the region to lock down polling stations and violence ensued yesterday. The images on social media of police using heavy-handed tactics against what appear to be peaceful men, women, and children are likely to further the Catalans’ resolve to secede. As an aside, the secession movement was unpopular according to polling data, but that is likely to change after this weekend. This is now likely to become a major problem for Rajoy and Madrid, and eventually be just as big of a problem for the EU.
ICYMI – September 29, 2017 Weekly Market Recap: Yields rose last week and extended the September snapback that pushed the 10-year yield up more than 20 bps for the month. The biggest portion of the climb occurred overnight Tuesday as global investors anxiously awaited the Wednesday release of the GOP’s framework for U.S. tax reform. On the corporate side, the highlights of the plan included a lower corporate rate of 20%, a 25% rate for income from pass-through businesses, and a one-time repatriation tax break. For individuals, there would be fewer marginal brackets and fewer itemized deduction options accompanied by higher standard deductions. The plan would also repeal the estate tax. Markets showed little response to a blizzard of Fedspeak but comments from Yellen and Dudley showed a willingness to continue gradually tightening policy. Yellen did, however, continue to indicate uncertainty surrounding the slowdown in inflation and the potential impact for monetary policy. Overall, the economic data was solid except for the latest results for new and pending home sales and PCE inflation. Yields also rose Friday after reports that the President met with Kevin Warsh to discuss the upcoming opening at the top of the Federal Reserve overshadowed another tick lower in the YoY PCE inflation rates. Click here to see the full recap.