Market Update: Thursday, October 4, 2018

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Daily Insights

  • Treasury yield hits 7-year high. The spike in rates came on the heels of a much better-than-expected ADP employment report, which sparked speculation that tomorrow’s nonfarm payrolls report could follow suit, and strong services sector data (see below). Add to that comments from Federal Reserve Chair Jerome Powell that the economic outlook is “remarkably positive” and that the Fed has a long way to go before interest rates hit neutral, and the result was a 12 basis-point surge in the yield on the benchmark 10-year Treasury note to 3.18%, its largest single-day increase since the U.S. presidential election in November 2016 that pushed it to seven-year highs. The bond market selloff has stock market investors a bit jittery this morning, although keep in mind that stocks and interest rates have generally risen together in recent decades (as we discussed in our September 24 Weekly Market Commentary). However, sharp swift moves, such as the “taper tantrum” in 2013, can cause pullbacks in stocks. Wage growth near 3% remains well short of the 4%-plus range that has historically marked the end of prior business cycles, but with the S&P 500 Index up nearly 10% year to date and policy uncertainty high, an increase in near-term market volatility would not be particularly surprising.

  • ISM data provides more evidence of above-trend economic growth. The ISM Non-Manufacturing Index jumped 3.1 points in September to 61.6, its highest level since August 1997 and the second highest ever recorded. The data suggests services activity accelerated and, coupled with the strong reading from the manufacturing counterpart, are consistent with economic growth north of 3%.Consensus was for a 0.5 point decline to 58.0.

  • Overseas manufacturing activity slowing. Lower global manufacturing Purchasing Managers’ Index’s (PMI) for September are consistent with slower growth overseas in the third quarter. The global PMI, at 52.5, fell for the fifth month to near a two-year low. According to Capital Economics, this level is consistent with global growth of about 3.5%, compared with the LPL Research forecast and Bloomberg consensus at 3.8%. The only countries not seeing a drop were Brazil and India. China’s PMI has averaged 51 over the past 18 months, so its drop to 50 is not particularly worrisome.

  • Oil pauses amid recent run-up. WTI crude prices are taking a breather around $75 per barrel as traders digest accusations from the U.S. State Department that OPEC is withholding nearly ~1.5 million barrels per day (bpd) of spare capacity despite members agreeing to reduce overcompliance with production cuts that have been in place since January 2017. Crude prices have jumped ~16% since mid-August as the U.S. is set to impose fresh sanctions on Iran early next month that analysts suggest will remove anywhere from 500k to two million bpd from global supply, while a bottleneck in U.S. supply making its way to market is also contributing to the bullish sentiment. Despite the recent run-up, we don’t see much upside for prices as U.S. supply chains work out the kinks and the U.S. applies further pressure to Russia and OPEC to begin utilizing spare capacity.

  • Another sign of a strong economy. The Conference Board’s Leading Economic Index (LEI) is one of our favorite economic indicators. Last month it came in up 0.4% from the previous month and up 6.4% year-over-year (YoY). The seven recessions since the early ’70s all saw the LEI go negative YoY an average of eight months before the eventual recession. Today on the LPL Research blog we will take a closer look at why the LEI is showing there is still plenty of time left in this economic cycle.

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Thursday

Friday

  • Trade Balance (Aug)
  • Change in Nonfarm Payrolls (Sep)
  • Unemployment Rate (Sep)
  • Japan Leading Index (Preliminary, Aug)


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