Stronger-than-expected economic data and upward revisions underpin US equity markets
US equity markets posted another solid performance last week as a result of better-than-expected economic data and Q2 corporate earnings. Additionally, it appears as though the Trump administration’s focus on what it can control (i.e., rolling back Obama era regulations) is effectively beginning to bare results in the form of economic resurgence.
Last week’s economic calendar provided a solid stream of encouraging data for investors. Monday’s Chicago PMI Report for July was a solid 58.6, though modestly below expectations that were calling for 61. Pending home sales for the period rose 1.5%, significantly stronger than both the previous month’s -0.7% and consensus that had been calling for +0.9%. Tuesday’s PMI Manufacturing Index report for July was 53.3. Consensus was calling for 53.2 while June’s reading was 52. ISM Manufacturing was 56.3, matching consensus.
A weak spot in the economic landscape came in the form of personal incomes and outlays and construction spending on Tuesday. Incomes were flat, while spending rose a scant 0.1%. Construction spending actually contracted in the month by 1.3%. The ADP report for July reflected a net gain of 178k jobs, but more importantly, June’s figures were revised from +158k to +191k. Adding additional near-term lift to crude, the EIA Petroleum Status Report for the week ending July 28 reflected a draw across all three verticals. Finally, on Thursday and Friday, economic data rounded out a solid week of better-than-expected results. Weekly jobless claims were 240k versus 244k consensus, Factory orders were 3.0% versus consensus of 2.7%, while June was revised higher to -0.3% from -0.8%.
The July employment report was icing on the cake. Initial actual results for July were +209k versus consensus of +178k, while June was revised higher to +231 from the initial reading of +222k. As impressive as those results were for June and July in terms of employment gains, the data within Friday’s report was equally encouraging. The official unemployment rate ticked down to 4.3%; private payrolls were +205k; manufacturing payrolls jumped by 16k while June’s were revised a substantial 11k higher to 12k; the participation rate rose 1/10 of 1% to 62.9; and average hourly earnings were a solid 0.3%. Average weekly earnings were also solid at 2.5%, and the average work week remained constant at 34.5%.
Path of least resistance for US stocks is up
Given the economic landscape laid out in last week’s releases, there is little to stand in the way of further gains for US equities, unless of course investors receive unexpected news on the geopolitical, interest rate, or earnings fronts.
In terms of the interest rate landscape, last week investors saw a degree of modest demand for US debt instruments that managed to push yields incrementally lower. The US 10-year (^TNX, TLT) closed out the week with a yield of 2.27%, up on the day (+1.75%), but modestly lower on the week having moved 0.3 bps lower. In a sign of shifting investor sentiment regarding the interest rate curve in the months ahead, according to the CFTC Commitment of Traders report released on Friday, speculative net longs of 10-years dropped to a three-month low. That shift in investor sentiment is in no small part due to the stronger-than-expected economic data we have received in the form of initial and revised economic data readings over the past month. The US 30-year closed out the week with a daily gain of 0.037% to close at 2.842%. That said, futures pricing on a move by the Fed in September remains subdued, while expectations for a move in December are considered likely (62%).
US equity markets remain in a confirmed uptrend despite recent and notable index divergence between the Nasdaq (^IXIC, QQQ) and Dow Industrials (^DJI, DIA). That uptrend is finding confirmation in Q2 results which have provided better-than-expected earnings and revenue growth in over 65% of the cases thus far. Additionally, in an interesting development on Friday, though volume on both the Nasdaq and NYSE (^NYA) slipped, the leading edge of the market’s modest tick higher was led by small caps, in the form of the Russell 2000 (^RUT, IWM). That dynamic runs counter to recent trends. On Friday, while the Nasdaq and S&P rose 0.2%, the Dow rose 0.3% and the Russell 2000 gained 0.5%. Clearly the prospects of a renewed risk-on mentality is a reflection of investor confidence. One sector that quietly garnered investor enthusiasm last week was home builders.
This week, highlights on the economic calendar include Monday’s Labor Market Conditions Index; Tuesday’s NFIB Small Business Optimism Index; productivity and costs and wholesale trade on Wednesday; jobless claims, PPI-FD on Thursday; and CPI on Friday. Of particular interest to me is Friday’s CPI report for July. Consensus is calling for a month-over-month (M/M) gain of 0.2% versus June’s 0.0%. On a year-over-year (Y/Y) basis, consensus is calling for 1.7%. Removing the volatile food and energy components from the reading, both M/M and Y/Y readings are expected to be exactly the same. In the event we receive a number north of 0.2% (I’m expecting +0.3%), look for a modest tick higher in yields for notes for a duration of 10 years and shorter.