Impeachment has been dominating the headlines these past few weeks, with some weak economic data sprinkled in between the headlines.  The lowest ISM Manufacturing reading in a decade and a big miss in non-manufacturing (albeit still an expansionary reading) is a cause for concern.  However, trade talks are set to resume with China and a “Goldilocks” jobs report at the beginning of October helped to stave off a break of support right around the 200 day moving average of ~2850.  

Market Technicals

This Month Comments

We tested the August lows yet again and still managed to make a marginally higher low around the 285 area.  However, the failure to make ATH’s on the rally in September puts the index in a precarious technical position.  As of now, the bias is still slightly to the upside, but watch for a break of 2850.

Prior Month Comments

The 280 level held strong on a triple bottom before the rally this week and we broke out to the upside from a consolidating triangle.  It looks like we are poised to test the all time highs again, barring any late night tweets.

Chart source Finviz.com

Economics

Source: Federal Reserve Bank of Atlanta

The ISM Manufacturing Index declined to 47.8 in September, lagging the consensus expected 50.0.  An ugly report once again from the manufacturing sector, as negative trade-related sentiment helped push the ISM manufacturing index to the lowest reading in ten years. That said, there are a few things to remember when evaluating today’s report. First, the ISM report is a survey, and can be impacted by sentiment (China trade concerns) as much as actual activity. Second, we have seen the index dip below 50 earlier in this recovery, without derailing the expansion. In 2012, the index fell below 50 on three occasions, once again in 2013, and 2015/16 saw the index fall into the 40s for five consecutive months. Each time, the economy kept growing.   (Levels higher than 50 signal expansion, below 50 signal contraction)

The ISM Non-Manufacturing Index declined to 52.6 in September, lagging the consensus expected 55.0.  If you take the ISM index at face value, activity in the service sector continues to grow, though at a slower pace than in recent months. Given that Monday’s report on the manufacturing sector showed a further decline below 50 (levels below 50 signal contraction), the pouting pundits are having a field day, but today’s report doesn’t support their doom and gloom pronouncements.  Yes, it’s true that reading of 52.6 is the lowest reading for the index in three years, but it remains in expansion territory, and the expansion remains broad-based with thirteen of eighteen industries reporting growth in September, while four showed a decline.  With the headline decline, you may expect respondent comments to be largely negative, but that wasn’t the case.  Respondents did note trade uncertainty impacting short-term pricing, but far more comments reflected a positive view on the current environment.    (Levels higher than 50 signal expansion, below 50 signal contraction)

Existing home sales increased 1.3% in August to a 5.490 million annual rate, beating the consensus expected 5.380 million.  Sales are up 2.6% versus a year ago.  The median price of an existing home fell to $278,200 in August (not seasonally adjusted) but is up 4.7% versus a year ago.  Average prices are up 3.5% versus last year.

Housing starts increased 12.3% in August to a 1.364 million annual rate, well above the consensus expected 1.250 million.  Starts are up 6.6% versus a year ago.  Following three months of declines, housing starts surged in August, beating even the most optimistic forecast by any economics group. The construction of new homes now sits at a 1.364 million annual rate, a new post-recession high, and activity is up a healthy 6.6% in the past year. Most of the gain in August was due to the more volatile multi-family sector where starts jumped 32.8%, the biggest monthly gain since 2016. However, single-family starts also rose 4.4% in August, posting the third consecutive monthly gain. It’s important to note that single-family starts have been on a general upward trend since bottoming in February and are in spitting distance of new highs. Meanwhile, multi-family starts have been range bound since 2015 when the upward trend broke down. On average, each single-family home contributes to GDP about twice the amount of a multi-family unit, so a continued shift back towards single-family construction will be a boon for economic growth.

Retail sales increased 0.4% in August (+0.5% including revisions to prior months) versus the consensus expected gain of 0.2%.  Add today’s retail sales report to the litany of other positive news coming out on the US economy over the past few months. A truly “data dependent” Fed should not have cut rates in late July and would not be heading for another rate cut next week, like it has signaled and as the financial markets fully anticipate. Today’s retail sales report shows the consumer is doing very well. Sales increased 0.4% in August, rising for the sixth consecutive month. The details of the report were a little more mixed than the overall headline would suggest as sales rose in only six of thirteen major categories, but there is no doubt the consumer is doing well.

Source: First Trust Economic Briefings

Yield Curve Watch

The entire curve fell on the back of a Federal Reserve cut of 0.25% in September, but the 10/2 spread did slightly widen to positive territory.  The 10 year is approaching 1.5%.

(10/7/19)

(9/5/19)

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The consumer appears to be bracing for rougher economic times ahead as they scale back on large durable goods purchases.

The other side of the weak ISM Manufacturing number is the decrease in export orders.  Is this a reflection of trade bottlenecks or is it more of a fundamental underlying weakness in global demand?