Stocks Rebound Despite Disappointing ISM Services Data
Market Movers
- ISM Non-Manufacturing Index of 52.6 was below 55 consensus and at a 3-year low.
- The disappointing release confirmed the weakness indicated by the ISM Manufacturing Index Tuesday.
- Stocks sold off on the release but have rebounded somewhat, remaining mixed/lower on the day.
- Initial Jobless Claims of 219,000 were slightly above the 215,000 estimate.
- Continuing Claims of 1.651 million were slightly below the 1.654 estimate.
Mike’s Commentary
Stocks fell sharply again today after the 10am release of the ISM Non-Manufacturing Index, which hit a three-year low of 52.6 and was below the 55.1 consensus. The Dow promptly dropped about 200 points on the news.
As we write, stocks came back to unchanged and are now down a modest 50 points with the S&P flat. The upside felt like short covering and/or hopes the Fed will ride to the rescue because there is not an obvious positive catalyst.
All eyes were on the ISM data after two days of weakness sparked by its manufacturing cousin suggested contraction in U.S. industrial production. The importance of the services economy to growth meant today’s release could have given bulls a counter argument but instead confirmed weak signals sent by the manufacturing gauge.
The market action this week has been all about the weaker than expected ISM Manufacturing print. Heading into this week, market sentiment (loosely) was that Europe may be weakening but the U.S. would be expected to grow at a slow but respectable 2%. The employment picture, low rates and consumer spending seemed to indicate we could possibly hold out until (if) there was a resolution of the trade conflict with China which would could spark further growth.
That all changed on Tuesday at 10:00 am with the ISM Manufacturing survey, which printed a 10-year low of 47.8 and a second straight sub-50 “contraction” reading. It’s “only” a sentiment indicator influenced by trade and other headlines but has been shown to be a leading indicator for other “hard” manufacturing indicators. Since Eurozone PMIs have been week for many months - Germany is notable here – investors started pricing in the idea that U.S. manufacturing is not immune to global pressures especially if business is slowing due to trade uncertainty. And the post-close news that the U.S. will impose tariffs on European goods starting October 18th after winning a WTO dispute makes trade resolutions seem that much further away.
With Q3 earnings set to mark a third straight quarter of negative comps, softening economic data here and abroad and other uncertainties including warning signals from the bond market investors sold stocks and also rotated into “safe” sectors like Real Estate and Utilities.
This set the stage for today’s 10:00 a.m. release of the ISM Non-Manufacturing Index, which joined the manufacturing index in signaling a slowdown. Real Estate, rental and leasing and wholesale trade saw decreased activity in September and services employment fell to the lowest level since February 2014.
Since much of the employment growth has been in the services sector, tomorrow’s jobs data is now of particular importance. The current low unemployment rate of 3.7% is held out as proof of underlying strength in the economy and September’s number is expected to hold steady at this level. But if the manufacturing and services economies are both set to slow down, the jobs picture could be at risk in the coming months. The current estimate for private payrolls to increase by 130,000 for September is the weakest projection heading into a jobs report in seven years. Private payrolls have been more volatile in 2019 with a high increase of 297,000 in January and a low of 46,000 jobs gained in February, averaging 145,000 for the year vs. an average increase of 215,000 in 2018 - with no gain below 100,000. Non-Farm Payrolls are expected to rise by 148,000 helped in part by census worker hiring.
So, the Dow shed about 300 points so far at the lows before rebounding from three-day declines of over 1,000 Dow points and the increasing number of warning signs had investors re-pricing stocks and once again fleeing into safety sectors like Real Estate, Consumer Staples and Utilities, until a bit of a rebound brought us back about flat on the day with what looks like some bargain hunting in the Tech and Healthcare sectors.
I guess the Fed is now on the spot for another rate cut. Implied odds for a cut at the October 30th meeting are now 93%! A week ago the odds were less than half of this at 49%.
This might explain the move back to flat on the day, but it feels a long way away from the close...
Sector Recap
Brian’s Technical Take
The big miss in the ISM services index is increasing concerns that the global manufacturing slowdown is spilling over into other sectors of the economy and the U.S. consumer. Stocks are lower for the 8th time in ten days with safe haven defensive sectors outperforming cyclicals.
Rates are lower across the board led by the shorter end of the curve. This is resulting in a bull steepener for the 10YR-2YR spread which is now at an eight-week high. The 10YR UST yield, now 1.52%, has given back 40bps from its September highs, 1.91%, while breaking back below all key Fibonacci levels which indicates we could see a retest of the August lows, or a lower low. The 50-day sma once again proved to be a reliable resistance level, which has been the case since Q4’18 as we noted two weeks ago in the 9/13 MIDDAY Update
The short term 2YR UST yield, a proxy for Fed monetary policy, bottomed today at 1.37%, its lowest level in two years. It could see support here at the 1.39% - 1.40% range which previously marked the highs, aka resistance, through the first three quarters of 2017. Noteworthy is the weekly RSI registered a double bottom at its June and August lows, and is now making a higher low as the short yield makes a lower low. This glaring bullish divergence, as yield is testing a key support level, puts this on watch for potential bullish reversal.
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Steven Brown is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq with over twenty years of experience in equities. With a focus on client retention he currently covers the Financial, Energy and Media sectors.
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Brian Joyce, CMT is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq. Before joining Nasdaq, Brian spent 16 years as an institutional trader executing equity and options orders for both the buy side and sell side. He also provided trading ideas and wrote technical analysis commentary for an institutional research offering. Brian focuses on helping Nasdaq’s Financial, Healthcare and Transportation companies, among others, understand the trading in their stock. Brian is a Chartered Market Technician (CMT).
Michael Sokoll, CFA is Associate Vice President on the Market Intelligence Desk (MID) at Nasdaq with over 25 years of equity market experience. In this role, he manages a team of professionals responsible for providing NASDAQ-listed companies with real-time trading analysis and objective market information.
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