The Market Today
Weak ISMs and Slowing Job Growth Take Toll on Investor Sentiment
by Craig Dismuke, Dudley Carter
Initial Jobless Claims Rise From Low Levels: Initial jobless claims rose more than expected last week from a revised-higher level the week before. The 4k increase pushed total initial claims to 219k, matching the highest level since early August. Claims have drifted higher for three consecutive weeks from low levels and reflect a slightly softer trends in the data. However, despite the slowing job growth, the overall claims level still points to a strong labor market.
ISM Service Survey Is Thursday’s Focus: The big report of the day will be the ISM’s Non-manufacturing Index that will be released at 9 a.m. CT. The index is expected to show the U.S. services economy cooled in September to one of its weaker paces from the last several years. A worse-than-expected reading could spark a volatile market reaction similar to the sharp flight to quality following the surprise contractionary manufacturing index earlier this week. Just before the ISM data, Markit will release revisions to its initial services PMI estimate.
Factory Orders Will Include Capital Goods Revisions: At 9 a.m. CT, the Census Bureau will release the Factory Orders report for August which will include revisions to initial estimates of capital goods activity released last week. A key indicator for business investment in equipment, capital goods orders were weaker than expected while shipments of the same perked up.
Three Fedspeakers: Scattered throughout the remainder of the day, three Fed officials will make public remarks. Kansas City’s Mester is scheduled for 11:10 a.m. CT and Dallas’s Kaplan in on the schedule for noon. Fed Vice Chair Clarida, who rarely breaks news but rather holds close to the company line, is the only voter among the group and will make his comments after markets close at 5:35 p.m.
Evans Is Open Minded About October Meeting: Already this morning, Chicago’s Evans, who currently votes on policy, said the weak manufacturing reading from the ISM was a concern, but he sounded sanguine about the outlook, in large part because of a solid consumer. Evans, who is more concerned about inflation, said, “I’m open minded about the decision. Whether one more rate cut at this point is the right decision or not, I think we’re just going to have to go into the meeting and see. The question is how accommodative we need to be. At the moment it’s still risk management.”
OVERNIGHT TRADING ACTIVITY
Global Equities Hold Up Well Considering Recent Events: Global equities have been relatively resilient so far Thursday despite yesterday’s sell-off on Wall Street and a WTO ruling late Wednesday that will allow the U.S. to move forward with tariffs on the EU (more below). Stocks sank across Asia but Europe’s Stoxx 600 was down just 0.1% halfway through its session.
Bond Yields Pull Back On Signs Of Continued Economic Weakness: Sovereign bond yields, however, are exclusively lower in response to the uncertainty and ahead of a critical survey of the U.S. services sector from the ISM later in the U.S. session. Released in front of the U.S. survey, services PMIs across Europe were generally disappointing relative to expectations. Spain’s index missed expectations while Italy’s posted an upside surprise. However, indexes tracking the larger French and German economies were revised lower in the final release. Germany’s composite was revised down to 48.5, its lowest since October 2012. As a result, the Eurozone’s composite was revised down to 50.1, the weakest since 2013.
Treasury Yields Have Slumped Since Surprise Manufacturing Contraction: Concerns that the slowdown in Europe is spilling over into the U.S. were heightened Tuesday after the U.S. ISM manufacturing Index contracted unexpectedly by the most in a decade. The 10-year Treasury yield is down more than 14 bps since that report was released, with 2.1 bps of that decline coming overnight. The 2-year yield is down 18 bps, 1.0 bps lower overnight, as bets the compounding evidence of continued economic weakness could force the Fed to cut again, possibly as soon as their next meeting. Fed Funds futures are pricing in a roughly 75% chance the Fed lowers rates again on October 30.
YESTERDAY’S TRADING ACTIVITY
Soft ADP Compounded ISM Concerns: Confirmation of slowing job growth didn’t sit well with markets still reeling from the worst month for U.S. manufacturing activity since the Great Recession. A day after the ISM’s Manufacturing index contracted unexpectedly and at the sharpest rate since 2009, ADP estimated private payrolls grew by 135k in September, 5k less than expected. While the three-month average ticked up as an unusually weak June rolled out of the calculation, the current 145k is well below the 220k average pace for 2018. The official BLS payroll data will be released Friday.
Stock Slump Deepened As Growth Worries Rise: U.S. equities opened to a sea of red on global equity screens, and quickly slumped to down more than 2% on the day. Markets across Asia had earlier tumbled in reaction to the U.S. ISM data and early losses for European stocks intensified as U.S. indices weakened Wednesday. A partial recovery left the S&P 500 down 1.8% and below its 100-day moving average for the first time in a month. Paired with Tuesday’s 1.2%, the index notched back-to-back losses in excess of 1% for the first time this year.
Treasury Yields Fall In Flight To Quality: The weakness in equities turned up the bid for Treasurys and pushed the yield curve lower and steeper for a second session. The 2-year yield dropped 6.8 bps while the 10-year yield slipped 3.6 bps. Treasury yields showed a muted response to news late in the session that the U.S. would put a 10% tariff of European aircrafts and a 25% tariff on certain other items after the WTO ruled in its favor and against EU subsidies to Airbus. Despite widespread weakness in global equities and the rally in Treasurys, European yields actually closed higher on continued mixed signals and signs of hesitancy from the Bank of Japan and European Central Bank.
Williams Said The Uncertain Outlook Stands In Contrast To Recent Strength In The Rear-View: President John Williams from the New York Fed said the economy is “in a good place,” but “We have seen signs of the economy slowing somewhat.” So while the we’re coming of a run of strong growth for the economy, “the real issue is, where are things going from here, and that’s where it’s a much more mixed picture.” The “number of crosscurrents” that are affecting the U.S. economy warranted the recent rate cuts which have put “monetary policy in the right place,” and “positioned to keep the economy growing at a sustainable pace.”