The Market Today
Yields Reverse Lower on Weakest ISM Manufacturing Index Since Great Recession
by Craig Dismuke, Dudley Carter
ADP Report Confirms Slowing Job Growth, Points to Moderate BLS Report on Friday: The ADP employment report is beginning to reflect the recent slowing of private-sector payroll growth in the BLS reports. For the month of September, ADP projects 135k new payrolls were added, slightly weaker than the expected 140k. Additionally, their June tally was revised down from 195k to 157k, closer to the BLS’s 96k reported last month. September’s data brought the 3-month average up to 145k, still notably lower than the average of 220k from 2018. Goods-producing jobs were soft again, up just 8k which included 2k in new manufacturing jobs and 9k in new construction jobs. The service sector added 127k payrolls, 30k below its 12-month average. While the ADP report’s accuracy in projecting the BLS report is hit or miss, the general trend of slowing job growth remains evident. Presuming uncertainty around trade policy is alleviated somewhat, we expect the slowing of job growth to level off near a monthly pace of 125k.
Mortgage Applications Rise on Jump in Refi Activity: Mortgage applications for the week ending September 27 on a 0.9% increase in purchase apps and a 14.2% jump in refi apps. According to the MBA report, mortgage rates ticked lower during the reference week with the 30-year fixed rate down 3 basis points to 3.99%. Purchase applications continue to point to a positive trend for home sales.
Fedspeak – Williams and Harker: New York Fed Bank President John Williams is scheduled to speak on a moderated panel in San Diego today at 9:50 a.m. CT. Williams roiled markets when he suggested a more aggressive rate cut might be warranted leading up to the July policy decision, only to partially retract the comments with a post-facto explanation from his research staff. Also speaking today is Philadelphia Fed Bank President Harker who has been resistant to rates cuts but isn’t in the voting rotation until next year.
OVERNIGHT TRADING ACTIVITY
Global Equities Sell-Off After U.S. Manufacturing Contraction: The ripples of yesterday’s contractionary ISM manufacturing index (more below) has widened out across equity markets in Asia and Europe. Global equity screens are a sea of red around 6:30 a.m. CT, helping to push the MSCI Asia Pacific Index 0.6% lower and the Stoxx Europe down 1.6%. A return of worries about global growth in the second half of September disrupted an upside recovery in yields that was built on some positive developments on trade (see the Monthly Review below).
Bond Yields Defy On Central Bank Questions: However, sovereign bond yields have held up relatively well in the face of the sell-off and actually pushed higher across most of Europe, as questions about the continued conviction of central bankers persisted. President Draghi from the ECB again said monetary policy will respond to support the economy, but “If fiscal and structural policies also play their role in parallel, …the side effects of monetary policy will be less, and the return to higher rates of interest will be faster.” Yesterday, the Bank of Japan’s announcement that it would buy fewer bonds this month spurred a global sell-off in yield.
U.S. Yields Diverged Lower: Ahead of this morning’s ADP report, the U.K. 10-year yield was 4.7 bps higher while Germany’s had pushed up 2.6 bps. The 10-year Treasury yield, however, had edged 1.2 bps lower and the 2-year yield added 3.0 bps onto its 7.6 bps drop on Tuesday. U.S. yields moved slightly higher after ADP’s payroll figure fell just short of expectations.
YESTERDAY’S TRADING ACTIVITY
Markets Reverse Sharply On Surprise Manufacturing Contraction: U.S. markets pivoted immediately following the latest data from the ISM that indicated U.S. manufacturing contracted unexpectedly in September at the sharpest pace since the Great Recession. Stocks sank quickly into negative territory and weakened throughout the day, sending the S&P 500 to close down 1.2% and near its low point of the day. All 11 sectors closed lower with materials and industrials companies not surprisingly seeing the steepest daily declines. Energy companies were the third-worst performers on softer oil prices and financials ended close behind in response to economic worries and lower yields.
Yields Traveled Wide Range During Flight To Quality: Treasury yields had moved notably higher overnight, caught up in a global sovereign sell-off led by Japanese government bonds. The Bank of Japan announced it would buy fewer bonds in October and an auction of 10-year Japanese government bonds was met with poor demand. Amid the selling, the 2-year and 10-year Treasury yields had added as many as 5.6 bps and 9.0 bps, respectively. Shortly after the surprise ISM contraction, the 2-year yield fell to down 9.0 bps, notching an intraday range of 14.6 bps. The 10-year yield bottomed at down 5.3 bps, setting an intraday range of 14.4 bps. By the close, the 2-year yield ended 7.6 bps lower at 1.55% and the 10-year yield closed down 2.9 bps at 1.64%.
Manufacturing Contraction Deteriorated Even Further In September: The ISM’s manufacturing PMI was a notable disappointment, falling deeper into contraction and missing to the low side of even the most pessimistic economist estimate submitted to Bloomberg. The headline PMI dropped unexpectedly in September to its lowest level since June 2009, adding to worries about a trade-related global slowdown. According to the ISM, U.S. manufacturing activity has contracted in back to back months for the first time since early 2016. September’s weakness was widespread and four of the five underlying indices echoed the contractionary headline. The contraction in new orders slowed but the pace of slowing in actual production hit its most severe level since 2009. While manufacturing hiring has held up in the nonfarm payroll data, the ISM’s indicator pointed to the steepest contraction in more than three years. Despite inventory weakness in the second quarter giving businesses room to restock in the third quarter, the report showed businesses remain hesitant to do so amid elevated uncertainty. Inventories contracted at their fastest pace in nearly three years. Sharpening the broader worries that weak global growth is spilling back into the U.S., an indication of new export activity contracted at the sharpest rate since the financial crisis. Manufacturing is a comparatively small sliver of total U.S. economic activity but the weakness will further fuel worries about the trajectory of the U.S. economy.
Construction Spending Missed The Mark On Weakness In Private Non-residential Categories: Construction spending rose less than expected in August and the prior two months were revised lower. The disappointment over the last two months have been concentrated within spending on private non-residential projects, as residential activity and public construction have been solid. In August, private residential spending was up 0.9% while private non-residential spending was down 1.0%. In July, residential spending rose 0.6% while non-residential spending dropped an even-worse 1.6%. The public sector, thanks solely to state and local spending, increased 1.4% in July and another 0.4% in August. On a year-over-year basis, public spending is positive while both categories of private spending are lower than in 2018.
ICYMI – September Monthly Review: Following a sharp decline in August, yields surged in the first half of September on positive trade and geopolitical developments, better-than-expected U.S. data, speculation about German fiscal stimulus, and questions about the ECB’s conviction for even more extreme monetary stimulus. However, a mid-month attack on Saudi Arabia’s oil facilities reinvigorated geopolitical concerns, weaker-than-expected data out of the world’s largest economies served as reminders of the tenuous outlook, and a formal impeachment inquiry into the president fanned the flames of an increasingly-divided U.S. political scene. Along the way, the ECB overhauled its monetary policy stance and the Fed cut rates but appeared sharply divided about what to do next. The Fed also made headlines by restarting its repurchase facility for the first time in a decade to calm stresses in overnight funding markets that pressured overnight rates abnormally higher, raising questions about the adequacy of reserve levels in the financial system. Ultimately, the 2-year yield rose 11.8 bps and the 10-year yield added 16.9 bps. Click here to view the full recap.