The Market Today
Today’s Main Event: Mid-Term Elections
by Craig Dismuke, Dudley Carter
JOLTS Jobs Openings Will Open For Tuesday’s Main Event, U.S. Midterm Elections: It’s no secret that the U.S. labor market is hot and a primary factor supporting the solid fundamentals underlying the U.S. economy. Within that sector, the monthly JOLTS reports have written some of the more remarkable headlines recently. Job openings have been on a tear as of late, with multiple records set this year for the level of employment opportunities available to those looking. A three-month trend of increasing openings is expected to have ended in September and economists forecast total openings fell from a record 7.14MM to 7.10MM. Still, that would be the second strongest since the series started in 2000 and lead to a seventh month in a row in which open jobs outnumbered unemployed workers.
But Tuesday’s main event should drown out the JOLTS report as investors will be much more interested in headlines and exit polls gauging how Democrats and Republicans are faring in their fight for majorities in Congress. Pollsters’ base case is for Democrats to regain the House and Republicans to retain the Senate. Again, if the results play out as expected the markets should not be excessively volatile in the short term. However, we remain reluctant to put too much weight on polling data based on recent results. If Democrats were to take control of both chambers, we would likely lower our forward interest rate projections by 10-20 basis points. Conversely, if Republicans take control of both, we would likely raise our rate projections 15-25 basis points.
Yesterday – Tech Weighed on U.S. Stocks, Yield Curve Flattened for First Time in Five Days: U.S. markets diverged on Monday as a disappointing day for tech companies left the Nasdaq in negative territory but couldn’t disrupt a general uptrend for the Dow and S&P 500. Four of five FAANG stocks dropped, with shares of Apple falling 2.8% to lead the group lower. A news report indicated the company had called off a request to produce more of one of its lower-priced iPhone models. However, due to weightings and sector allocations, the information technology sector was the second worst performer within the S&P 500. The newly-created communication services sector, which houses Facebook, Alphabet (Google), and Netflix fell more to finish in last. Eight of the index’s eleven sectors rose, with real estate, energy, and financials closing in the top three spots. Despite shorter yields pushing higher during Monday’s trading, under pressure after the auction of 3-Year Treasury notes tailed with a weak bid-to-cover, the longer maturities moved below Friday’s close. The 2-year yield added 0.4 bps to 2.91% while the 10-year yield fell 1.1 bps. As a result, the curve flattened for the first time in five days, down 1.5 bps to 28.9 bps.
Overnight – Markets Await U.S. Midterm Outcomes: There appears to be little conviction to push global markets in either direction overnight ahead of Tuesday’s main event. Markets have been mixed so far Tuesday so Americans set to head to the polls and determine who will hold majorities in Congress starting in 2019. U.S. futures were modestly lower, in line with a mostly down day in Europe and after a mixed session across Asia. The only pieces of data worth mentioning that were released overnight were slight revisions to several PMIs in Europe. The aggregate Eurozone’s October Composite PMI was revised up from 52.7 to 53.1, but still represented its lowest level since September 2016. Considering all of the political uncertainty that continues to overhang Italy’s economy, its surprisingly disappointing PMI was also noteworthy. Italian yields rose more than most after its October PMI printed a contractionary 49.3, the lowest since November 2013. The report comes amid continued arguing between the country’s leaders and EU officials about Italy’s 2019 budget. Treasury yields were lower by less than 1 bp and U.S. futures remained negative closer to the start of U.S. trading.
ISM Shows Services Activity Remained Strong in October: The ISM’s October Non-manufacturing PMI fell less than expected, showing activity in the services sector kept up a brisk pace last month. After jumping to 61.6 in September, a 21-year high for the index, the headline PMI pulled back to a 60.3 which marked its fourth best reading since 1997. After providing the biggest boosts in the September report, the business activity/production index and the employment index both edged down 2.7 points. The new orders index was essentially flat at around the 2018 average while supplier deliveries slowed modestly. The biggest overall changed was a five-point drop in the index tracking backlogged orders. As was the case with the manufacturing report, tariffs were the most frequently mentioned concern in the “What Respondents Are Saying” section.