Sliding Into the Close
DOW + 23 = 16,374
SPX + 2 = 1951
NAS – 16 = 4733
10 YR YLD – .03 = 2.17%
OIL – .12 = 46.63
GOLD – 8.70 = 1126.00
SILV + .03 = 14.83
Wall Street started the session on a high note, but could not hold it. Stocks slipped into the close and the Nasdaq turned red for the day. The stakes couldn’t be higher for the tomorrow morning’s August employment report, even though the month has typically been cursed by disappointment. The consensus guesstimate calls for about 215,000 to 220,000 new jobs created in August, with the unemployment rate holding at 5.3%, but August is notorious for misses. From 2005 to 2014, forecasters have over-estimated the initial August payrolls print seven times, including in each of the past four years.
What’s more, the Labor Department (excluding annual and benchmark revisions) has marked up its first estimate in subsequent months in eight of the past 10 years. Part of the puzzle of forecasting August payrolls is the difficulty in adjusting for annual changes in the school-year calendar. Financial-market turmoil, at least, probably did little to impact hiring decisions in August. The government surveys households and businesses in the week that contains the 12th of the month, so the data will reflect responses covering the Aug. 9-15 period; that was a few days before the market rollercoaster ride began.
Short-dated Treasury debt yields, which are tied most closely to monetary policy forecasts, rose in August, with the two-year note yield logging its fifth straight monthly increase. That was its longest winning streak since 2006 when the Fed last raised interest rates. Long-dated Treasury yields, often seen as a safe haven from stock market volatility, are virtually unchanged on the year, suggesting that bond investors are brushing off the panic about slowing global growth. This would suggest that bond traders are bracing for an imminent rate hike.
The European Central Bank will continue its 60 billion-euro a month asset purchase plan; that’s the Euro version of QE. The stimulus is intended to help get consumer price inflation back toward the ECB’s target of just below 2%. In the year to August, it stood at 0.2%. ECB President Mario Draghi today said it could go negative in the coming months following recent oil price falls. Draghi said: “The risks to the euro area growth outlook remain on the downside…” And if things actually do get worse, Draghi emphasized he is willing to do even more. The euro dropped against the dollar and Eurozone stock markets enjoyed a nice bounce.
Chinese markets are closed today and tomorrow to mark the 70th anniversary of the end of World War II. The holiday is officially called “The 70th Anniversary of Victories in the Chinese people’s War of Resistance Against Japanese Aggression and the World Against Fascism”; and right there we have a glimpse into the problems in China. Presiding over the extravaganza, President Xi Jinping said China would remain committed to “the path of peaceful development” and unexpectedly pledged to slash 300,000 troops from the country’s 2.3 million strong military. The announcement came before a huge military parade. At the same time, the U.S. government reported that five Chinese Navy ships were sailing in international waters off Alaska for the first time.
Treasury Secretary Jack Lew criticized China’s handling of its currency devaluation. In a CNBC interview, Lew said, “there’s an economic and a political reality to things like exchange rates,” and “how they manage their exchange rate is a matter of great concern to us and that they need to be willing to let market forces drive the value up, not just drive it down.” Lew, will be participating in a meeting of G-20 financial ministers and central bankers Friday in Turkey. The treasury secretary’s remarks come ahead of the Chinese premier’s visit to the U.S. later this month.
Tomorrow brings the big monthly jobs report for August. This will be the data that the Fed will use at their FOMC meeting September 16 & 17; the question is whether the report will be weak enough to keep the Fed from hiking rates or strong enough to allow a hike.
Also tomorrow, the G-20 will be meeting in Turkey. The International Monetary Fund has prepared a report for G20 finance chiefs, and the IMF says the turmoil in China and other factors like capital flow reversals were increasing the risks to economic growth around the world. It warned that advanced and emerging economies need to continue to support demand with reforms and investment to ensure that the turbulence in markets and China’s troubles do not stall economic activity in the rest of the world.
The report expressed continued confidence that growth is picking up “modestly” in advanced economies in the second half of 2015 and in 2016, helped by the impact of cheaper oil. But the oil price plunge, along with other commodities, is hurting emerging market economies, and they are also being buffeted by the impact on their currencies of China’s yuan devaluation and the strong dollar. The dollar’s strength, the Fund warned, could take a toll on companies with dollar liabilities. The Fund highlighted an increase in risks to overall global growth: that China would not confront its slowdown with growth-supporting policies; that commodity prices would slide further; that the US dollar would continue to rise; and that companies would suffer from higher debts.
Of course, writing a report doesn’t make it so. The reality on the ground is that gauging China’s economy is a guessing game; the Chinese simply don’t measure their economy in familiar ways and they certainly run their economy a bit differently. And most analysis overlooks the fact that China’s economy is changing; the service sector is now the driver of growth, so it makes sense that industrial growth is slowing down, but it doesn’t necessarily mean the economy has gone over a cliff. Beijing’s economic policy makers know that even though structural overhauls will moderate growth in the near-term, they’ll also bolster long-term growth and help stave off a major deceleration.
The U.S. trade deficit fell in July to its lowest level in five months as exports rose. The Commerce Department said the trade gap narrowed 7.4 percent to $41.9 billion, the smallest since February. The smaller deficit implied a modest contribution to gross domestic product from trade early in the third quarter.
The Institute for Supply Management said its services index slipped in August, to 59% from 60.3% in July, but still a very strong reading indicating growth in the sector. Ahead of Friday’s payrolls report, the ISM services employment index fell 3.6 points to 56%.
The Commerce Department reported today on the gross domestic product broken out for each state for 2014. Just 16 states outperformed the country as a whole last year. In 32 states, gross domestic product advanced at the same or slower pace than the 2.2% economic growth recorded for the U.S. And the economies in two other states, Alaska and Mississippi, contracted last year. Among those 16 were the four largest state economies: California, Texas, New York and Florida. The fastest growing state was North Dakota, thanks to a booming oil patch; it is unlikely to repeat in 2015. Arizona came in at #37, with anemic 1.4% growth in GDP.
Jobless claims increased by 12,000 to 282,000 in the week ended Aug. 29. Since the beginning of March claims have held below 300,000, indicating employers in the U.S. are confident in their outlook.
Sony Pictures has reached a settlement with former employees in a lawsuit related to the massive data breach it suffered almost a year ago. The federal lawsuit, which is still pending class-action status, is a combination of seven different cases brought by nearly 50,000 current and former employees whose personal, financial and medical information were posted online. Additional details about Sony’s settlement are expected to be filed by mid-October.
Novartis said it will begin selling the first biosimilar drug in the U.S. after an appeals court in Washington rejected a request to block the Swiss drug maker’s sale of its copycat version of Amgen’s blockbuster remedy, Neupogen. Zarxio was the first biosimilar–a copy of a biotechnology drug–approved by the FDA. In Europe, where biosimilars have been available for several years, they typically cost 15% to 30% less than the original brands.
Royal Dutch Shell’s proposed $58 billion merger with BG Group has received unconditional clearance from the European Commission, the third of five key markets needed to clear the deal. The EU’s top antitrust regulator concluded that the acquisition would not allow Shell to influence prices for oil and natural gas, and that the markets would remain competitive after the transaction.
Pimco Total Return saw another $1.8 billion in net outflows in August, down from $2.5 billion in July and $3 billion in June. Total assets under management at the former giant of mutual funds have now fallen below $100 billion for the first time since 2007 (the fund neared $300 billion at its peak). As for the performance scorecard, Pimco Total Return’s year-to-date gain is 0.72% vs. the benchmark of 0.45%. It’s also outperformed the benchmark over 3-year, 5-year, and 10-year periods, as well as since its inception.
Meanwhile, Bill Ackman has joined a string of high profile hedge fund managers in reporting deep losses for August. The firm’s Pershing Square Holdings portfolio dropped 9.2%, and is now down 0.1% since January. Last year the fund gained 40%, beating the S&P’s 13.7% gain. Other hedge fund losses for August: Greenlight Capital -5.3%; Third Point -5.2%; Jana Partners -4.3%; Viking Global -2.1%; Omega Advisors -6%; Andor Capital -4.5%.