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LIVE MARKETS-The Delta blues: Handicapping Friday's jobs report

reuters.com · 09/01/2021 14:08
LIVE MARKETS-The Delta blues: Handicapping Friday's jobs report

S&P 500, Nasdaq gain; Dow edges above flat; NYFANG up nearly 2%

Real estate leads S&P sector gainers; energy weakest group

Dollar, gold, crude slip; bitcoin rises

US 10-Year Treasury yield ~1.30%

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Market participants always drop what they're doing when the Labor Department releases its monthly employment report.

And the August numbers, due on Friday, are liable to attract even more scrutiny that usual. Payrolls are a lagging economic indicator, one which the Federal Reserve watches closely in order to determine the direction of its monetary policy.

But not only that, there's the ongoing global health crisis, compounded by the COVID Delta variant and a persistent worker drought.

With all that in mind, Oxford Economics (OE) has published a jobs report curtain raiser.

The global financial and economic analytics firm sees a 674,000 increase, pulling the unemployment rate down 0.1 percentage point to 5.3%.

These forecasts are less optimistic than the consensus views of economists polled by Reuters, who expect payrolls to gain 750,000 and unemployment to fall to 5.2%.

Lydia Boussour, senior economist at OE believes "a more cautious approach in the face of the fast-spreading Delta variant" last month "could have dampened workers' willingness to return to work and led some companies to hit the pause button on hiring."

Boussour goes on to write that "The August jobs report could be pivotal for the Federal Reserve as it prepares to reduce its bond-buying program this year. Meanwhile, policymakers will likely see the report as another step toward "substantial further progress," underpinning OE's "expectations of a November taper announcement."

OE's recovery tracker follows several metrics as part of its employment subcomponent, including temporary employment, online searches for 'unemployment insurance,' initial and emergency jobless claims, job postings and employees working.

As seen in their graphic below, the 'job postings' element is the outlier, reflecting the record number of open positions reported in the Labor Department's most recent JOLTS report, and a glaring reminder of the current worker shortage plaguing U.S. employers:

On the bright side, the customer-facing services sector, which suffered the brunt of mandated social distancing restrictions at the beginning of the health crisis, is expected to show continued recovery.

"We still anticipate that the leisure and hospitality sector remained a key driver of employment growth in August," Boussour adds, which she expects will "offset some of the expected loss of hiring momentum."

(Stephen Culp)



Jack Ablin, chief investment officer and founding partner of Cresset, is out with a note arguing that the combination of fiscal spending and easy money will ensure jobs are abundant and wages will rise. However, Ablin says productivity will undoubtedly fall in response.

According to Ablin, at some point the job market will become too tight and the least-productive workers will join the labor force, creating service problems and margin pressures on their employers.

While Ablin believes robust growth is great for lifting all boats, he also thinks it's key to pay attention to labor-intensive businesses that compete for unskilled workers. He thinks employers will be motivated to innovate with technology to counter the higher costs and lower productivity that accompanies a tight labor market.

In the short run, however, he thinks employers could get squeezed by this. Therefore, Ablin says to focus on sectors with high market caps per employee, like communications, technology and utilities. He believes this will tend to single out high- valued-added or capital-intensive business that generally don’t rely on a large, unskilled workforce.

Meanwhile, Ablin says consumer discretionary and consumer staples could see their margins come under pressure as a result of higher wages.

(Terence Gabriel)



Passive investing still dominates U.S. investment portfolios as inflows to U.S.-domiciled ETFs are on pace for another record year, with BlackRock Inc BLK remaining the market share leader for the popular ETF industry, Jefferies says.

Inflows to U.S.-domiciled ETF's have increased to $539 billion so far this year as of Aug. 25, or nearly double the comparable period in 2020 of $266 billion, the brokerage said in a note on Tuesday.

U.S. equity ETF's accounted for about $289 billion of the inflows, up from the year-ago period's $80 billion, Jefferies said.

Passive funds represented about 51% of assets under management (AUM) at mutual funds, while fixed income mutual funds was about 31%, it said.

Year-to-date inflows of $705 billion as of July 30 to ETFs has pushed global industry AUM to $9.1 trillion. But the global ETF market only represents about 7% of the estimated asset management industry worldwide, according to Jefferies.

BlackRock, Vanguard and State Street oversee about 81% of the global ETF market, with about $3 trillion under management. Vanguard manages about $2 trillion of ETFs, followed by State Street with about $1.1 trillion.

(Herbert Lash)



The first month of fall and the last month of the third quarter were heralded with the release of a data cornucopia, which contained tastes ranging from sweet to sour.

Starting with the good news, factory activity surprised by expanding at an ever-so-slightly accelerated pace last month due to an uptick in new orders.

While analysts expected a nominal loss of momentum, the Institute for Supply Management's (ISM) purchasing managers' index (PMI) USPMI=ECI gained a miniscule 0.4 points to 59.9. nN9N2NL018

A PMI number higher than 50 signifies activity accelerated from the previous month.

U.S. factories fared well when social distancing restrictions caused a demand shift away from customer-facing services in favor of goods. However, economic reopenings have sent that pendulum swinging the other way, even as hobbled supply chains squeeze input prices.

But ISM's August report shows prices paid easing to an eight-month low, even if the ongoing labor shortage once again pulled the employment component into contraction territory.

While demand remained strong, supply and labor constraints remain overhangs.

"Business Survey Committee panelists reported that their companies and suppliers continue to struggle at unprecedented levels to meet increasing demand," writes Timothy Fiore, chair of ISM's Manufacturing Business Survey Committee.

"The new surges of COVID-19 are adding to pandemic-related issues — worker absenteeism, short-term shutdowns due to parts shortages, difficulties in filling open positions and overseas supply chain problems — that continue to limit manufacturing-growth potential," Fiore adds.

These sentiments were echoed by the survey's participants, who tossed around phrases like "supplier parts and manpower challenges" and "lack of workers" and "persistent supply issues."

Global financial information firm IHS Markit also released its final take on August manufacturing PMI USMPMF=ECI, delivering a cheerier reading of 61.1. Markit and ISM PMIs differ in the weight they apply to the indexes' various subcomponents.

But ADP delivered the day's bitterest pill.

Private employers added 374,000 jobs in August according to payrolls processor ADP, undershooting consensus by a mile.

ADP's National Employment Index (NEI) USADP=ECI August number falls 326,000 short of the 700,000 gain in private payrolls analysts expect the Labor Department's more comprehensive employment report to show on Friday. nL1N2Q30WG

And while ADP and the Labor Department use vastly different methodologies to arrive at their numbers, some analysts believe the data is indicative of a broad cool-down in labor market recovery amid a persistent worker drought and nagging concerns over the highly contagious COVID Delta variant.

"The Delta Covid wave likely is to blame; the hit to consumers' spending on discretionary services is clearly visible in the near-real-time data," writes Ian Shepherdson, chief economist at Pantheon Macroeconomics. "We expect a further Delta hit in September, though we hope it will be offset, at least partly, by the effects of school reopening and the ending of enhanced unemployment benefits."

Expenditures on construction projects USTCNS=ECI increased by 0.3% in July, eking out a 10-basis-point upside surprise. nW1N2Q3002

As expected, the Commerce Department's report showed increased spending on residential projects as the supply of homes continues its ongoing struggle to keep up with demand. Outlays on residential construction are up a whopping 27% year-over-year.

While a 1% decline in spending on transportation projects was unsurprising, the drop was mitigated by a 1.9% increase in highways/streets, a counterintuitive move in light of Washington's hefty infrastructure spending package which is moving ever-closer to President Biden's pen.

Finally, the Mortgage Bankers Association (MBA) tells us demand for home loans weakened by 2.4% last week.

With the average 30-year fixed contract rate USMG=ECI holding steady at 3.03%, applications for loans to purchase homes USMGPI=ECI eked out a 0.6% gain, but that was handily offset by a 3.8% drop in refi applications USMGR=ECI, which represent the lion's share of total demand.

"Underlying demand, still-low mortgage rates and a small increase in the inventory of existing homes are supportive of home sales," says Nancy Vanden Houten, lead economist at Oxford Economics." However, supplies are still historically tight, and that, along with home prices at record levels, will continue to temper the pace of home sales."

"Homebuying affordability has deteriorated significantly as home prices have rocketed higher," she adds.

Wall Street has staggered out of September's starting gate, weaving between red and green.

At last glance, strength in growth .IGX is boosting the Nasdaq to record levels, while some cyclicals are among the laggards.

(Stephen Culp)



The Nasdaq hit a record high out of the gate on Wednesday as weaker-than-expected private payroll data fueled hopes for extended support from the U.S. central bank. .N

The NYSE FANG+TM Index .NYFANG, which finally closed at a new high on Tuesday, above its prior peak set on February 16 of this year, is outperforming with a gain of more than 1%. NYFANG is now on pace to rally nearly 9%, in just 9 trading days.

Utilities .SPLRCU and real estate .SPLRCR are the best performing major S&P 500 sectors, while more economically sensitive groups are on the weak side. The Dow Transports .DJT and small-cap Russell 2000 .RUT are also red on the day.

Growth .IGX is outperforming value .IVX. In fact, the IGX/IVX ratio is now nearing its all-time high set in September 2020.

Meanwhile, July construction spending and August ISM Manufacturing PMI both came in above estimates. ISM prices paid pulled back to their lowest in eight months.

Here is where markets stand in early trade:

(Terence Gabriel)



The U.S. benchmark 10-year Treasury yield is likely to rise to 1.90% in the coming months after potentially forming a reversal pattern, but first it needs to break above the key 1.40% level, according to analysts at JPMorgan.

The yield has bounced from a possible double bottom of 1.128% on July 20 and 1.127% on August 4, levels that the bank said were overbought in Treasuries. Now that this trend has decelerated JPMorgan is “looking for an eventual release to higher yields.”

The 1.40% area, which is close to the top end of the T-Note's recent trading range, needs to be broken in order to take yields higher still, analysts including Jay Barry and Jason Hunter said in a report sent late on Tuesday.

“We believe a move through the 1.40% inflection is required to create a bearish medium-term momentum dynamic, in which selling pressure has an increased chance of creating more selling pressure,” they said.

The 10-year yield US10YT=RR is around 1.29% on Wednesday.

Several trend-following signal thresholds also sit between 1.45% and 1.60% and a break through support in the mid-1.40% area would “open the door for a rapid trend to retest” the 1.79% level, JPMorgan said.

Longer-term support for the 10-year Treasury then resides in the 1.90% area, “levels we believe the market to attain in the months ahead,” they said.

(Karen Brettell)



The S&P 500 .SPX rose for a 7th straight month in August, which is its longest such streak since a 10-month run of gains ending in January 2018. The benchmark index advanced 2.9% last month and is now up 20.4% year-to-date, which has it on track for its biggest yearly rise since a 28.9% advance in 2019.

That said, the S&P 500 is about to enter its worst month of the year.

Using Refinitiv data back to 1928, September has been the worst month, on average, for the S&P 500. It's average change is a decline of 1%:

Of note, through Tuesday, it has now been 342 calendar days since the SPX last ended a decline of more than 5% on a closing basis.

Interestingly enough, that decline developed in the wake of the S&P 500's September 2, 2020 high, from which it slid 9.6% into its September 23, 2020 low.

Additionally, from 1928 to 2020, there were 31 Augusts with a gain of more than 2%. However, in those instances, the S&P 500's average change for the rest of the year was a gain of only about 0.5%.

Therefore, whether this September lives up to its reputation or not, the broad-market average may face a struggle from now to the end of the year. nL1N2Q20R6

(Terence Gabriel)



(Terence Gabriel is a Reuters market analyst. The views expressed are his own)