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What the Near Government Shutdown Means for Markets

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Government Shutdown Means for Markets: Start a free trial of The Sevens Report.

What’s in Today’s Report:

  • What the Near Government Shutdown Means for Markets (Higher Yields)
  • ISM Manufacturing Index Takeaways – Better Than Feared

Futures are little changed this morning. More evidence of cooling inflation was offset by global central bankers continuing to threaten more rate hikes.

Economically, Swiss CPI came in at 1.7% vs. (E) 1.8% y/y in September. The Core figure fell to 1.3% from 1.5% previously which was the latest report to confirm the ongoing trend of global disinflation.

The RBA held policy rates steady at 4.10% overnight. But joined the growing chorus of ECB and Fed officials who have reiterated future hikes on the table. Global yields edged higher in early trade which is keeping a lid on equity futures this morning.

Looking into today’s session, we will receive data on Motor Vehicle Sales (E: 15.3 million). But more importantly, jobs week kicks off with today’s JOLTS release which is expected to show 8.9 million job openings.

An inline or modestly lower-than-expected JOLTS headline would be welcomed as it would help dial back some of the recent hawkish money flows. While an unexpected increase could spark a continued rise in yields, adding pressure to equity markets.

Finally, there is a 52-Wk Treasury Bill auction at 11:30 a.m. ET and while we typically do not monitor Bill auctions too closely, stocks came for sale and yields rose right at 11:30 a.m. yesterday. When the results of a 3-Month and 6-Month Bill auction hit the wires with higher yields than previous (hawkish). So if we see weak demand and higher yields in the late morning auction today, that could be a drag on equities and other risk assets.

What the Near Government Shutdown Means for Markets (Higher Yields)

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Jobs Report Preview

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Jobs Report Preview: Get the simple talking points you need to strengthen your client relationships with a free trial of The Sevens Report.

What’s in Today’s Report:

  • Jobs Day

Futures are modestly higher ahead of the jobs report following slightly better than expected final global manufacturing PMIs.

Economic data overnight was better than expected as the Chinese Caixin manufacturing PMI (a private market reading) beat estimates (51.0 vs. (E) 49.3). While EU (43.5 vs. (E) 43.7) & UK (43.0 vs. (E) 42.5) final manufacturing PMIs were no worse than feared.

Today there are two important economic reports that have the potential to move markets.  The first is the jobs report, and expectations are as follows:  170K Job Adds, 3.5% UE Rate, 0.3% m/m & 4.4% y/y Wage Growth).

As we covered in the Jobs Report Preview, “Too Hot” readings in job adds or wages will likely push Treasury yields higher and weigh on stocks.  But, a “Too Cold” job adds number would be a potentially more concerning signal over the medium and longer term, regardless if there’s any short term “bad is good” rally.

The other important economic report today is the ISM Manufacturing Index (E: 46.8) and markets will want to see stability.  The August flash PMIs were ugly and if we see the ISM manufacturing PMI drop from current levels, that will increase hard landing concerns.

Finally, there’s one Fed speaker today, Mester at 9:45 a.m. ET, but she shouldn’t move markets.

Jobs Report Preview

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Tom Essaye Quoted in Barron’s on July 3rd, 2023

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Stocks Tick Lower to Start Holiday-Shortened Session

“At this point, and with yields this high, markets need to see solid data and that means the ISM Manufacturing PMI moving closer towards 50 and beating expectations,” Sevens Report Research’s Tom Essaye writes. Click here to read the full article.

ISM Data Points To Rising Odds of a Hard Landing

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What’s in Today’s Report:

  • Trading Color – Quarterly Rebalancing Helps Improve Breadth
  • ISM Manufacturing Index Takeaways – Not a Good Report
  • If the Yield Curve Is Right, The U.S. Economy Will Roll Over Hard

U.S. equity futures are tracking global markets lower this morning after more disappointing PMI data overnight.

Economically, China’s June Composite PMI dropped to 52.5 from 55.6 in May with the Services Index notably missing estimates at 53.9 vs. (E) 55.9. Meanwhile, the Eurozone Composite PMI fell into contraction at 49.9 vs. (E) 50.3.

Looking into today’s session, there are two economic reports to watch: Motor Vehicle Sales (E: 15.3 million) and Factory Orders (E: 0.9%), although barring any huge surprises, neither should materially move markets ahead of the Service PMI data and June jobs report due later in the week.

From there, focus will turn to the release of the June FOMC Meeting Minutes at 2:00 p.m. ET as markets look for further clarity on the Fed’s commitment to raising rates further in H2’23 (a hawkish interpretation would weight on risk assets).

Finally, there is one Fed speaker: Williams but not until the closing bell at 4:00 p.m. ET so any impact by his comments will likely not be realized until tomorrow.

What Drove Yesterday’s Rally? (It Wasn’t AI)

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What’s in Today’s Report:

  • What Drove Yesterday’s Rally? (It Wasn’t AI)

Futures are higher and global markets rallied overnight on rising hopes for a rapid decline in inflation.

Inflation metrics on Thursday hinted at accelerating disinflation (ISM Prices Paid and Unit Labor Costs were yesterday’s bullish catalysts) and that was reinforced this morning by a decline in Korean CPI.

Chinese stocks surged overnight thanks to a Bloomberg article that raised hopes for more government stimulus.

Today focus will be on the jobs report and estimates are as follows: 180K job adds, 3.5% Unemployment Rate and 0.3% m/m & 4.4% y/y wage gains.  Given yesterday’s momentum, if the jobs report shows solid job gains and underwhelming wage growth, the rally should continue.  However, if the jobs report comes in “Too Hot” on the headline or wages, don’t be surprised if markets give back part of yesterday’s rally.

Hard Landing vs. Soft Landing Scoreboard

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What’s in Today’s Report:

  • Hard Landing vs. Soft Landing Scoreboard (Table Included)

Stock futures are tracking global equity markets lower while bonds rally thanks to disappointing bank earnings.

FRC, which has been in focus since the banking turmoil began in March, is trading lower by more than 20% in the premarket after reporting that deposits fell more than 40% in Q1 to just $104.5B vs. (E) $145B while the bank plans to cut as much as 25% of staff in Q2. The lower than expected deposit levels rekindled worries about the health of the banking system and financials are dragging the broader market lower this morning.

Today, there are a few economic releases to watch: Case-Shiller Home Price Index (E: -0.4%), Consumer Confidence (E: 104.2), and New Home Sales (E: 635K) but unless there are any material surprises, investors will remain focused on earnings as we will begin to get some of the big tech companies’ results after the close today.

On the earnings front we will hear from UPS ($2.19), VZ ($1.19), GM ($1.58), MCD ($2.30), GE ($0.13), PEP $1.37), and MMM ($1.60) before the open, and MSFT ($2.22), GOOGL ($1.07), V ($1.97), and TXN ($1.76) after the close. Investors will be looking for good top and bottom line results but potentially more importantly, solid guidance given the uncertain market backdrop right now.

Three Catalysts in Focus

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What’s in Today’s Report:

  • What Can Break the S&P 500 Out of the Current Trading Range? Three Candidates
  • ISM Manufacturing Index Takeaways (Fairly “Goldilocks”)
  • OPEC+, Oil Prices, Inflation, the Economy, and Fed Policy – They’re All Tied Together

U.S. stock futures are tracking European markets higher this morning thanks to a cooler-than-expected inflation print in Europe while news flow was otherwise mostly quiet overnight.

Economically, Eurozone PPI for February came in at -0.5% vs. (E) -0.3% m/m but a still lofty 13.2% vs. (E) 13.5% y/y. Despite the still elevated annual figure, the lower than expected print is bolstering risk assets this morning.

Today, there are three economic reports to watch in the U.S. including: Motor Vehicle Sales (E: 14.9 million), Factory Orders (E: -0.4%), and JOLTS (E: 10.4 million). Investors will want to see more evidence of slowing growth and a weakening labor market to reinforce hopes for both a less-hawkish Fed and soft landing in order for the recent stock market resilience to continue.

Finally, there is one Fed speaker to watch late in the day: Mester (6:45 p.m. ET).

Why Fed Rate Hike Expectations Are Still Rising

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What’s in Today’s Report:

  • Why Fed Rate Hike Expectations Are Still Rising
  • Did Yesterday’s Economic Data Signal Stagflation?
  • EIA Analysis and Oil Market Update

Futures are extending Wednesday’s declines and are moderately lower as more global inflation data came in hotter than expected.

Euro Zone HICP rose 8.5% vs. (E) 8.2% y/y and joined French, Spanish and German CPIs as signaling a bounce back in inflation.  That’s pushing global yields higher and weighing on futures (just like it weighed on stocks on Wednesday).

Today focus will remain on economic data and the key report is Unit Labor Costs (E: 1.4%).  Wages are a major source of inflation the Fed is trying to bring down, so if Unit Labor Costs are lower than expected, that will likely cause a bounce in stocks and bonds.  Other notable events today include Jobless Claims (E: 200K) and two Fed speakers, Waller (4:00 p.m. ET) and Kashkari (6:00 p.m. ET), although they shouldn’t move markets.

Tom Essaye Quoted in MarketWatch on February 8th, 2023

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The bond market is flashing a warning that U.S. stocks could be headed lower

“The spike in the 2-year yield tells us the market is now believing the Fed when it has been saying it’s going to raise rates close to or above 5%, notably, it wasn’t Powell’s commentary that got the market to believe that — it was the economic data from Friday, notably the jobs report and ISM Services PMI,” Essaye said, the founder of Sevens Report Research. Click here to read the full article.

Market Multiple Table: December Update

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What’s in Today’s Report:

  • Market Multiple Table December Update: Macro Improvement But It’s More Than Priced In
  • November ISM Services Index Takeaways

Futures are little changed this morning despite a stabilizing bond market and mostly positive global news flow overnight as yesterday’s hawkish money flows are digested.

Economically, German Manufacturer’s Orders rose 0.8% vs. (E) -0.2% in October suggesting that factory demand may be stabilizing.

In China, new Covid cases have declined for 8 consecutive days and the government is reducing testing requirements, bolstering optimism about a move away from the crippling Zero Covid policies.

Today is lining up to be a fairly slow day of news with just one lesser followed economic release: International Trade in Goods and Services (E: -$80.0B) and no Fed speakers as they remain in their pre-meeting blackout period. That said, equity markets will likely queue off of Treasuries and if we see a further rise in shorter-duration yields due to rising terminal rate expectations, yesterday’s declines could very well continue.

 

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