Market Observations - Aug 31
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ECON Brief for 8/30/2023:?This morning, ADP reported that private-sector employment rose by 177k in August, down from the 371k increase in July and the smallest gain in 5 months. According to the forecast, private-sector employment was expected to rise by 195k in August.
Also, this morning, MBA mortgage applications rose 2.3% in the week ending August 25, following a 4.2% decline the week prior. The 30-year mortgage rate, meanwhile, was unchanged from the previous week at 7.31%, the highest since December 2000.
Wholesale inventories fell 0.1% in the preliminary July report, less than the 0.3% decline expected and following a 0.5% gain in June.
Finally, this morning, pending home sales unexpectedly rose 0.9% in July, following a 0.4% increase in June. According to the median forecast, pending home sales were expected to drop 1.0% at the start of Q3. Over the past 12 months, however, pending home sales fell 13.8%, following a 14.7% drop the month prior.
U.S. Wednesday Market Wrap:?Equities’ upward momentum over the last four trading sessions indicates that investors remain optimistic about a soft landing. Investors might get a better read on the Fed’s next actions on Thursday when its preferred gauge of inflation--the personal consumption expenditures index--is published. Today, the tech-heavy Nasdaq led the way, finishing the day up 0.50%; the S&P gained 0.4% while the Dow advanced 38 points or 0.1%. The worst performer in the S&P was HPQ, losing nearly 7% after it reported a ~10% drop in quarterly revenue and gave disappointing guidance. Nine of eleven S&P sectors closed green. Technology +0.76% led, and utilities -0.45% lagged.
Signs of a normalizing job market continue to pile up. Today’s ADP employment report showed just 177,000 jobs were added in August, well below July’s 371,000 and Wall Street’s expectations of 200,000. Meanwhile, U.S. second-quarter GDP growth was revised lower from 2.4% to 2.1%, driven by businesses reducing inventory levels and capital expenditures.
U.S. wholesale inventories fell 0.1% in July vs. an expected gain of 0.2%. Meanwhile, retail inventories rose 0.3% in July. And U.S. pending home sales jumped 0.9% in July, topping estimates for a 0.6% decline. Pending sales are still down 14% YoY as a lack of affordability and existing inventory keep the market at a standstill.
Software giant Salesforce rose 6% after reporting better-than-expected earnings and raising its full-year forecast. Meanwhile, cloud software company Okta soared 10% after beating expectations and raising its annual earnings outlook by a third.
Shares of semiconductor design company Ambarella plummeted 20% after seeing a “weak” demand environment, causing it to lower its third-quarter revenue forecast.
Position-squaring ahead of today’s U.S. personal consumption data and perhaps tomorrow’s jobs report gives the dollar a firmer profile against most G10 and emerging market currencies. The Scandis have been the hit hardest and are off 0.75%-0.85%. The euro and sterling were about 0.35%-0.45% lower. The yen is the only G10 currency that is slightly firmer.
Despite the firmer-than-expected preliminary August Eurozone CPI, European 10-year yields are off 3-6 bps. The U.S. 10-year Treasury yield is slightly below 4.10%, shaving about 2bps from yesterday’s settlement. Two-year yields are down 4-9 bps in Europe, with the U.S. two-year Treasury yield a little more than 2bps near 4.86%. Recall that the U.S. two-year yield peaked on Monday at around 5.10%.
Softer yields but a firmer dollar keeps gold activity subdued, and it is holding slightly below yesterday’s high near $1949.
Equities are trading mixed. Japan’s stocks traded higher, as did Australia, but the other large bourses in the region fell.
The SXXP in Europe is firmer and recouped yesterday’s minor loss (-0.15%) in full.
The S&P futures are flat, but the NASDAQ futures are a little softer.
The large drop in U.S. oil inventories reported yesterday, and more speculation that Saudi Arabia may extend its extra unilateral cut through October are helping to extend oil’s rally. October WTI is at a two-and-a-half-week high, poking above $82. If sustained, it will be the 6th consecutive advance, the longest streak since January. It is up about 2.8% this week.
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China’s PMI was slightly better than expected but not sufficiently to change assessments, and China’s CSI 300 fell in back-to-back sessions for the first time in two weeks. The recovery from the re-opening post-zero-Covid has been a quick fade. Many market participants want to give the world’s second-largest economy last rites, as it were, blaming its ideology, which had generated more than an eight-fold increase in per capita GDP in a single generation and is largely, even if not solely responsible for reducing extreme global poverty in the past forty years. Development economists warn that with the urbanization of China, the focus for a further reduction in global poverty shifts to India, which does not have nearly as impressive of a track record. That means that the closing of the gap between the rich and poor globally will slow, if not reverse. Still, the pace of deterioration of China’s PMI appears to be slowing, with a slight uptick in the manufacturing PMI (49.7 vs. 49.3) but a little slowing in the non-manufacturing PMI (51.0 vs. 51.5). The composite remained above 50 (51.3 vs. 51.1), suggesting that some of the talk about China in a recession (i.e., contracting) may be exaggerated.
According to the preliminary estimate, inflation in the Eurozone was firmer than expected, bolstered by today’s French report that showed a 1.1% rise in the month-over-month harmonized rate for a 5.7% year-over-year gain. The EMU aggregate reading showed that the headline rate rose by 0.6% after falling by 0.1% in July. The year-over-year rate remained at 5.3%, while the core rate slipped to 5.3% from 5.5%. The three-month annualized rate slowed to about 3.2% from 4.5% in the previous three months. The base effect indicates that there is likely to be substantial progress in September and October.
Although the weekly initial job claims are due, they are overshadowed by tomorrow’s BLS report and today’s personal income and consumption report. Consumption is expected to outstrip income for the second consecutive month and the fourth month in the first seven. The median forecast is for a 0.3% increase in personal income and a 0.7% rise in personal consumption. The rise in consumption speaks to the strong demand Fed Chair Powell referenced in last week’s speech at Jackson Hole.
Given the sensitivity to inflation, the PCE deflator is keenly followed. It is, after all, the measure of inflation that the Fed targets. However, you can argue that the CPI captures its essence despite the different baskets and weightings. In H1, headline CPI rose at an annualized rate of about 3.4%, and the PCE deflator rose at an annualized rate of roughly 3.2%. The core CPI rose at an annualized rate of 4.6% compared with the core PCE deflator’s annualized increase in H1 of about 4.1%. The forecast is for a 0.2% increase in the headline and core PCE deflators, which would increase the year-over-year increase at 3.3% and 4.2%, respectively, up from 3.0% and 4.1% in June. In the future, consumption is expected to weaken over the remainder of the year as job growth slows, savings are drawn down, and student loan servicing resumes. In GDP terms, consumer spending rose 4.2% in Q1 and 1.7% in Q2. It is seen slowing to 1.5% this quarter before settling in at around 0.5% for Q4 23 and Q1 24. What can possibly go wrong?
Crypto Market Rundown:
The Securities and Exchange Commission’s (SEC) war against the crypto industry has hit some significant snags recently. Its largest defeat came as the courts sided with Ripple, dealing a major blow to the SEC’s position that nearly all cryptocurrencies are securities. And this week, it lost against Grayscale, which has been trying to convert its bitcoin trust GBTC into an exchange-traded fund (ETF). On the positive side, the industry’s regulatory environment is slowly becoming clearer. Very slowly.
As of 8:30AM ET, the global crypto market cap is $1.09T, down 0.38% in the past 24h. At the time of writing, BTC is trading around $27,220. ETH is trading just above $1,700.
The amount of BTC on exchanges continues to drop as we get closer to the halving... According to Chainalysis, "BTC total flows in the last day are 174.97k BTC, the highest level in 48 days."
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