Stocks gapped up at the open, continuing yesterday’s rally. The Dow is currently up 440 pts and the SPX is up 1.3%. The more cyclically sensitive sectors—industrials, financials, energy, tech—are up well over 2% in early trading. On the other hand, defensive sectors near all-time highs are selling off today (i.e. utilities, real estate). The VIX Index fell back to 16 and VIX October futures fell to 18. In other words, traders aren’t expecting a massive jolt of market volatility over the next 30-60 days. The reaction in commodity markets isn’t surprising: gold fell and copper rose. Even oil, which has had a hard time lately, is back up around $57.40/barrel in early trading. Bonds (except for high-yield “junk”) are selling off. The 10-year Treasury yield jumped back to 1.58% as the price fell. And by the way, over the last couple of trading sessions the yield curve turned positive.
US and Chinese trade negotiators plan to meet again next month. According to CNBC, “reliable China insiders” are hinting at a potential “breakthrough.” One of those insiders is the editor-in-chief of the Global Times, a state-controlled media tabloid. He apparently wrote a lengthy commentary predicting “new developments” in trade talks. That sounds vaguely promising until you read his follow-up Tweet: “…the US is worn out by the trade war, may no longer hope for crushing China’s will [and therefore] there’s more possibility of breakthrough between the two sides.” That statement seems rather presumptuous with respect to the Trump Administration’s intentions.
We got a load of economic data this morning, most of which proved encouraging. ISM’s monthly survey of service sector businesses jumped to 56.4 in August from 53.7 in the prior month. Remember, as with any PMI survey 50.0 is the dividing line between expansion and contraction. Also remember that service businesses (as opposed to manufacturing) make up about 90% of the US economy. ISM’s index surprised economists by recovering sharply from a three-year low. Digging into the details, hiring activity slowed somewhat but is still rising. The critical forward-looking “new orders” component shot up to 60.3, although new export orders have flat-lined. The cost of doing business is rising; “prices paid” rose to 58.2.
Payroll processor ADP estimates the US economy generated 195,000 new jobs in August, well ahead of expectations. Most economists say it takes about 75,000 jobs per month just to keep up with normal population growth and one would think that job growth should fall to that level as we reach full employment. But it hasn’t. What’s more, weekly filings for unemployment insurance have fallen to levels not seen in a generation.
The University of Michigan’s Consumer Sentiment survey fell to 89.8 in August from 98.4 in the prior month. The survey’s chief economist noted that “Trump’s tariff policies have been subject to repeated reversals amid threats of higher future tariffs. Such tactics…act to increase uncertainty and diminish consumer spending at home.” And while the “overall level of sentiment is still consistent with modest gains in consumption,” he sees “increased likelihood that consumer could be pushed off the ‘tariff cliff’ in the months ahead.” This clearly bears watching since the latest round of trade tariffs targets consumer goods.