Market in a Minute: Sept 30 – Oct 4, 2019
by Rich and Sheila Jamison
Equities ended modestly lower after a volatile week amid signs of slowing US growth. The Tuesday-Wednesday plunge made for a tough start to October. The S&P 500 fell over 1% on both days, its worst October start ever. It opened down further on Thursday, reaching minus 4.1% for the week at one point. Late-week rallies on China trade news and the monthly jobs number recovered much of the early-week losses.
The US 10-year Treasury yield note fell by 16 basis points to 1.52%. Its decline came amid growth concerns and increasing expectations that the Fed would cut rates further, perhaps not only in October but also in December.
WTI crude oil declined 5.6%, to $52.78/barrel, in response to rising inventory levels.
Volatility, according to the CBOE’s Volatility Index VIX, ended at 17, off slightly from last week’s 17.2 close. The late week rebound in risk markets saw volatility readings fall from 20 on Wednesday, a level that has contained volatility for much of this year.
It was affirmed that the Chinese negotiators would be here this week. That was the only positive for the China trade talks but it generated a bit of hope that boosted the market.
Meanwhile, in response to the EU subsidizing Airbus, the World Trade Organization (WTO) ruled the US can impose $7.5 billion in tariffs on imports from the EU. The Trump administration acted quickly. Rather than strike Europe's Airbus directly by imposing tariffs of up to 100% on their airplanes, it spread tariffs across several sectors. Aircraft will be subject to a 10% duty while French wine, Scotch whiskey and other goods will be subject to 25% tariffs. The EU is expected to have a similar claim against us when the WTO decides a subsidy case concerning Boeing aircraft early next year.
In order of their release and market effect, we saw the ISM Manufacturing Index, ISM Non-Manufacturing Index, and Employment Situation Report.
September’s ISM Manufacturing Index fell to 47.8% (from 49.1% a month ago), its worst reading since June 2009. The continued weakness in the sector forced investors to reassess earnings prospects and premium valuations, especially if the weakness trickled over into the consumer-oriented services sector.
September’s ISM Non-Manufacturing (services) Index fell to 52.6% (from 56.4% in August). Though services activity did slow down as suspected, the ensuing selling may have been too much, too soon.
September’s nonfarm payrolls showed a continued slowing in the pace of hiring, increasing by 136,000 (vs. 147,000 expected), with total upward revisions for August and July of 45,000. On the other side of that coin, the unemployment rate dropped to 3.5%, the lowest in 50 years (i.e., since December 1969). Average hourly earnings were flat (vs. expectations for +0.3%). This can be translated as “no wage inflation pressure.”
European data remained challenged. The Eurozone manufacturing PMI fell to 45.7 from 47, the lowest level since the sovereign debt crisis of 2012, while Germany's manufacturing reading decelerated to 41.7. Meanwhile, Eurozone inflation continued to decline, weakening to 0.9% in September.
The WTO downgraded its global trade growth forecasts. World trade is now expected to grow 1.2% this year, down from an April forecast for 2.6%, and stated downside risks remain elevated. It also said its 2020 projection for 2.7% growth is predicated on a return to more normal trade relations.
A German economic institutes group slashed its collective economic growth forecasts to just 0.5% for this year and 1.1% for 2020. Weaker global demand for German exports and business uncertainty caused by trade disputes and Brexit were blamed. To counteract the growth slowdown, the groups called on the German government to abandon its pledge to incur no new debt if the growth outlook continues to deteriorate. Very weak German purchasing managers' indices suggest no upturn is likely in the near future.
More Brexit: Prime Minister Boris Johnson made a new Brexit proposal to the EU. The plan has not won the EU's endorsement. Johnson said that if intensive talks between the UK and EU were not underway immediately, there would be no prospect of an agreement. On Friday, the EU gave Johnson one week to improve his proposal before the European Council summit on October 17 and 18. As it stands now, Johnson is obligated by law to seek a three-month Brexit delay unless a deal is reached with the EU by October 19, but he has vowed not to comply.
The Reserve Bank of India, the latest central bank to react to the slowdown in global growth, lowered its repo rate 25 basis points, to 5.15%. The Reserve Bank of Australia also cut interest rates, by 0.25% to 0.75%, and indicated more cuts are expected. This is the Australian central bank's third cut in the past five months.
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