WAITING ON THE FED

Stocks opened sharply higher this morning (Dow +99 pts; SPX +.6%), probably because recent economic data (see below) encourages traders to believe the Federal Reserve will soon begin lowering interest rates.

Payroll processor ADP says the US economy generated 102,000 new jobs in the month of June. That’s a lot better than May’s 41,000 but it’s also less than economists were forecasting. The fear, of course, is that hiring activity is slowing, whether because economic growth is slowing or because we’re already at full employment. It’s true that there are more open positions than job seekers.

ISM’s Non-Manufacturing Index, which measures business activity in the service sector, fell to 55.1 in June from 56.9 in the prior month. The decline was a bit more than economists were expecting. And while any reading above 50.0 indicates continued expansion of activity, the index is down around a 2-year low. The index’s key forward-looking new orders component fell to 55.8, the lowest since December 2017. In both manufacturing and service sectors, overall business activity as well as hiring, cost inflation and new orders are slowing. A spokesman for ISM noted the trend and said surveys “reflect mixed sentiment about business conditions and the overall economy. A degree of uncertainty exists due to trade and tariffs.” However, business activity “continues to reflect strength.”

Investors are rightly concerned about the trade war’s impact on business investment. And today we learned that corporate capital spending continued to soften in May. New orders for capital equipment excluding defense/aircraft are up only 1% from year-ago levels. That compares with 7% growth a year ago. Still, Bloomberg points out that conditions aren’t as bad as many anticipated. At least business investment is still showing some growth. Perhaps some underlying resilience can be teased out of this report.


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