Stocks had a negative tone today as traders try to put economic fears tied to Fitch's lower credit rating on US debt behind them. Crude oil prices continued to trend higher of tomorrow's OPEC-plus meeting, with Saudi Arabia is extending its oil one million barrels per day oil cut for the month of September for at least another month. Oil prices were also boosted by lower US oil stocks, and an anticipated soft landing for global economies. Employment data still reflect a tight labor market ahead of tomorrow’s highly anticipated monthly jobs report, expected to show that the economy created 200,00 0jobs last month, with an unemployment rate remained at 3.6%.
Bottom-line: Risk-off.
TODAY’S MAJOR NEWS
Bond yields rising as buyers disappear
Yields on 10-year Treasuries continue to rise, reaching nearly nine-month highs overnight, narrowing the inversion with 2-year yields. The rise in 10-year yields reflects the mounting concerns in the market regarding the US debt problem, compounded by a feared rotation of Japanese investors out of the US market back to their own securities. US national debt has grown by $1.8 trillion in the past two months just as the Federal Reserve is reducing its pace of purchases of debt instruments by $1.14 trillion per year. The primary way to find new buyers for this debt is through higher yields. This directly impacts mortgage rates on homes and rates on other consumer debts. This is how monetary policy, fiscal spending and credit rating changes combine to negatively impact the economic outlook
Chinese economic data continues to be weak
Economic data out of China remains concerning, despite government efforts to jumpstart the economy. Passenger car sales totaled 1.73 million in July, down 5% from the previous year when much of the country was in Covid lockdowns. That's a larger decline than the 2.6% drop seen in June, due to July sales coming in 8% below June sales. The data shows that 37% of the cars sold were electric vehicles. EV sales are up 33% year-on-year, although they were down 3% on the month, compared to being up 14.7% month-on-month in June. This suggests that the higher income earners who are first adopters on the EVs are starting to pull back purchases due to deteriorating confidence in the economy. On a related note, China's top battery maker accounts for nearly 37% of world market share for EV batteries, with its second top maker accounting for another nearly 16%. South Korea comes in second as a battery supplier to world EVs at 24% market share.
Modest unemployment claims highlight tight US labor market
- First-time claims for unemployment benefits rose to 227,000 in the week ending July 29, up from 221,000 the previous week – a modest increase
- The four-week moving average fell to 228,250 claims
- Continuing claims for the week ending July 22 rose 21,000 to 1.7 million
- The four-week moving average of continuing claims fell by 4,500 to 1.712 million claims
- The Challenger job-cut report showed corporate layoff intentions at 23,697 employees in July, down from 40,709 reported in June
Labor productivity very strong, offsetting wage inflation
- Nonfarm productivity rose at an annualized rate of 3.7% in the second quarter, nearly triple the 1.3% expected by analysts
- Furthermore, productivity for the first quarter was revised to -1.2%, up from the -2.1% originally reported
- Productivity tends to increase when workers are worried about keeping their jobs, whereas it tends to fall when they feel that they are in charge of the job market
- Unit labor costs rose at an annualized rate of 1.6% in the second quarter, less than an expected 2.6%
- First quarter costs were lowered to 3.3% from the 4.2% originally reported
Kerch Strait bottleneck for oil and grain exports
The Kerch Strait between Russia and Crimea serves as a vital passage of Russian crude oil and wheat to the export market, including nearly 40% of its wheat shipments, with dozens of ships passing under the Kerch bridge every week. This is the bridge that has periodically come under attack by Ukrainian forces, as it serves as a conduit for Russia to transfer military support resources to the war in southern Ukraine. Those attacks stepped up following Russia’s pullout from the Black Sea Grain Initiative and its subsequent attack on Ukraine export infrastructure.
TODAY’S MAJOR MARKETS
Equity markets
- Equity markets marked time today, with the S&P and Russell 2000 off 0.3%, while the Nasdaq was off 0.1% at the close
- Global markets were also lower, with the Nikkei 225 off 1.7% on profit taking, while the FTSE 100 and DAX were down by 0.4% and 0.2%, respectively, while
- The VIX, Wall Street’s fear index, fell back to 15.9
Currencies and Bonds
- The dollar index fell by 0.1% against a basket of currencies, to 102.5
- Sterling and Euro dollar cross rates were both unchanged, while the Yen rose by 0.6%
- Bonds continued to fall, spooked by the Fitch downgrade, with yields on 2- and 10-year Treasuries at 4.88% and 4.19% respectively
Commodities
- Crude oil prices rose 0.3% to $81.75 per barrel, ahead of Thursday’ OPEC+ meeting
- Gold and silver prices were unchanged at $1,970 per ounce and $23.7 per ounce, respectively
- Grain and oilseed prices were mixed
Analysis by Arlan Suderman, Chief Commodities Economist: [email protected]
Market outlook by Paul Walton, Financial Writer: [email protected]
