Market Commentary for Week Ended 10/4/2019

The stock and bond market action this week was primarily driven by economic data.  The S&P 500 fell roughly 3% Tuesday - Wednesday as the ISM Manufacturing Index indicated that the manufacturing sector is currently contracting. 

Then, on Thursday the ISM Non-Manufacturing Index showed that the services portion of the economy, while still growing, experienced a lower level of growth than anticipated by economists.  This second blast of bad news sent the S&P 500 down an additional 1.2% within 10 minutes; however, it was quickly bid higher 2% to close up 0.8% for the day as market participates determined that the bad news will increase the odds that the Federal Reserve will cut short-term rates further.  

Lastly, the monthly jobs report came out today.  The 136k jobs added was below economists’ consensus expectation of 145k.  The unemployment rate dropped to 3.5% of those actively pursing employment which is the lowest level since the 60’s.  Usually a tight labor market leads to higher inflation, a relationship we have highlighted in the past.  However, Friday’s report indicated a muted increase in wages of 0.4%, bolstering the case that the Federal Reserve is running below it’s 2% target inflation rate and thus has room to cut interest rates further.  The market rallied on this sentiment.

Report details:

1. Tuesday Oct. 1^st – ISM Manufacturing Index:  This index is a composite of survey results from 300 manufacturing firms nationwide and is generally considered a leading indicator.  The categories covered are the general direction of production, new orders, order backlogs, their own inventories, customer inventories, employment, supplier deliveries, exports, imports, and prices. 

The reading came in at 47.8.  A reading below 50 signals a contraction.  The consensus among economists was for 50, which is neutral.  A notable source of the disappointment was from new export orders, which at 41 posted their third consecutive month in contraction.

2. Thursday Oct. 3^rd – ISM Non-Manufacturing Index:  This index is a composite of survey results from 375 firms from numerous sectors.  The categories covered are services, construction, mining, agriculture, forestry, and fishing and hunting.

The reading came in at a disappointing 52.6. A reading above 50 signals growth.  The consensus among economist was for 55.5.  The takeaway:  the service sector is still growing but growth is slowing.

3. Friday Oct. 4^th – Employment Report: The jobs report highlights various indicators in the employment situation.  The important factors are the number of jobs added, wage inflation and the headline unemployment rate. 

The report indicated that 136k jobs were added to the economy in the month of September. This is below economist’s consensus of 145k.  The unemployment rate surprisingly dropped to 3.5% which would suggest that the labor market is tightening and those looking to hire may have to increase wages or perks to attract workers.  However, befuddling economists, wage inflation was muted at 0.4% for the month.

After receiving these disappointing reports this week, market participates have increased the odds of two further rate cuts this year to 40%.