September 6, 2016

Stocks opened mixed this morning (Dow & SPX flat). Energy, telecom and utilities are the best-performing sectors thus far, up about .5%. Biotechs and gold miners are also higher in early trading. Banks, semiconductors and transports are lower. The VIX Index is up a bit to 12.4 and VIX October futures are trading at 16.2. European stock markets are up modestly and Asia was mostly higher overnight. The dollar is lower today against a basket of foreign currencies. WTI crude oil is down slightly to $44/barrel. Bonds are higher on the day, with yields moving lower. The 5- and 10-year Treasury yields are back down to 1.14% and 1.56%, respectively. 

ISM’s non-manufacturing index dropped to 51.4 in August from 55.5 in July. That’s far weaker than expected as well as being the lowest reading since early 2010. Bloomberg notes this report corroborates weakness in ISM’s manufacturing index, perhaps indicating “an abrupt slowdown that may signal waning optimism about the economy.” ISM surveys business leaders about the strength of business activity, and 50.0 is the dividing line between contracting and expanding activity. So while this current reading suggests continued growth, it obviously reveals deceleration last month. And it took economists completely by surprise. Digging down into the index’s sub-components, new orders fell to 51.4, order backlogs fell to 49.5 and employment fell to 50.7. This is obviously concerning, but it stands in stark contrast to other reports showing strength in consumer data (i.e. home prices, consumer spending, wages).  

Saudi Arabia and Russia jointly announced the countries will work together to “stabilize” oil markets. This is not a production freeze as investors had hoped, but is probably a step in the right direction. RBC Capital Markets says this is a “symbolic attempt to shore up sentiment,” and also hints at the “duress that sovereign oil producers are enduring.” In other words, low oil prices are shredding Saudi’s national budget. The country’s budget deficit grew to 16% of GDP last year. Bloomberg reports the Saudi government is canceling new spending projects and slashing ministry budgets. Saudi Arabia may have succeeded (at least temporarily) in shutting down much of the non-OPEC (North American) oil production, but that victory has come at a price. 


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