Market Update - August 5

The stock market spent most of the session trading flattish at the index level. The major indices eked out slim gains, though, on the last session of the month due to a nice move higher in the last 10 minutes of trading. The Russell 2000 paced index gains by a decent margin, rising 1.1%.

Many stocks participated in the late afternoon climb. The market-cap weighted S&P 500 rose 0.2%; the Invesco S&P 500 Equal Weight ETF (RSP) rose 0.3%; and the Vanguard Mega Cap Growth ETF (MGK) rose 0.1%.

In the early going, the major indices largely traded in narrow ranges near their flat lines as participants looked ahead to a busy week of earnings. There's also some market-moving economic data, including the July ISM Manufacturing Index on Tuesday, the July ISM Non-Manufacturing Index on Thursday, and the July Employment Report on Friday.

Even when the major indices were flattish, market breadth still reflected a positive bias. Advancers led decliners by a 5-to-2 margin at the NYSE and a 5-to-3 margin at the Nasdaq.

Reviewing Monday's economic data:

• Chicago PMI rose to 42.8 in July (Briefing.com consensus 43.0) from 41.5 in June

The stock market encountered some selling pressure to begin the new month. Downside moves, though, were relatively modest. Selling interest was fueled by rising market rates and the feeling that the market is due for some consolidation. With Tuesday's losses, the S&P 500 was still up 19.2% for the year.

The Dow Jones Industrial Average outperformed (+0.2%), closing with a slim gain thanks to a big move higher in Caterpillar (CAT), which reported pleasing quarterly results.

Some other notable companies that reported earnings endured sizable losses. Norwegian Cruise Line Holdings (NCLH), ZoomInfo Technologies (ZI), and Uber (UBER) were among the standouts in that respect after reporting less than perfect results and/or guidance. The aforementioned stocks sold off after seeing big gains in the months leading up to their reports.

The action in the Treasury market created a headwind for equities. The 10-yr note yield settled back above 4.00%.

Reviewing Tuesday's economic data:

• The S&P Global US Manufacturing PMI rose to 49.0 in the final July reading from 46.3 in the prior reading.\
• The July ISM Manufacturing Index rose to 46.4% in July (Briefing.com consensus 46.8%) from 46.0% in June The dividing line between expansion and contraction is 50.0%, so the sub-50.0% reading for July reflects a general contraction in manufacturing activity for the ninth straight month, albeit at a slower rate than the pace of contraction in June.
  • The key takeaway from the report, other than the manufacturing sector continuing to operate in a state of contraction, is that there are more signs of employment reductions in the near term to better match production. Those reductions are in-line with the Fed's thinking that its rate hikes will lead to some softening in the labor market.
• Total construction spending increased 0.5% month-over-month in June (Briefing.com consensus 0.6%) after increasing an upwardly revised 1.0% (from 0.9%) in May. Total private construction was up 0.5% month-over month while total public construction rose 0.3% month-over-month. On a year-over-year basis, total construction spending was up 3.5%.
  • The key takeaway from the report is that residential spending continues to be powered by new single family construction to meet demand that cannot be satisfied through the existing home market.
    JOLTS job openings totaled 9.582 million in June following a revised total of 9.616 million in May (from 9.824 million)

Wednesday's trade featured an orderly stock sell off with mega caps and growth stocks pacing broad based losses. The catalyst that drove selling interest was a jump in market rates, which gave inventors an excuse to take some money off the table in a market that is overbought on a short-term basis.

Market rates had been moving lower, though, in overnight action despite the news that Fitch Ratings downgraded its U.S. credit rating to AA+ from AAA. The downgrade reflected the expected fiscal deterioration over the next three years, growing government debt, and erosion of governance related to peers.

Treasury yields started to climb, however, immediately after the cash open, turning sharply higher around 8:15 a.m. ET with the release of the ADP Employment Change Report. The jump in Treasury yields briefly sent the 10-yr yield past its high from July (4.094%) to a level not seen since early November.

Ultimately, yields backpedaled from their highs. 

Pressured by the rising rates, mega cap stocks saw disproportionate selling interest, which led to a 2.1% loss in the Vanguard Mega Cap Growth ETF (MGK).

Reviewing Wednesday's economic data:

• The weekly MBA Mortgage Applications Index fell 3.0% with purchase applications falling 3.0% and refinance applications also falling 3.0%
• The ADP Employment Change showed a 324,000 increase in private sector payrolls in July (Briefing.com consensus 185,000) following a revised 455,000 increase in June (from 497,000).
• The weekly EIA crude oil inventories showed a draw of 17.1 million barrels after last week's draw of 600,000 barrels.

The stock market had a mixed showing with price action in the mega cap stocks driving a lot of the index level movement. The major indices exhibited losses right out of the gate, but climbed into positive territory by mid-day.

Market participants were digesting a huge batch of news, including a huge slate of earnings reports since Wednesday's close, an uptick in selling interest in longer-dated Treasuries, a 25-basis points rate hike by the Bank of England to 5.25%, and more chatter about the downgrade of the U.S. credit rating by Fitch Ratings.

Treasuries started to widened their losses after the release of a better than expected report on productivity and unit labor costs. Weekly initial jobless claims increased slightly, but still reflect a strong labor market. Meanwhile, the ISM Non-Manufacturing Index showed that services sector growth decelerated in July.

Ultimately, the major indices closed with slim losses, showing some resilience amid ongoing calls for a pullback. Market breadth was negative, but modestly so. Decliners had a 3-to-2 lead over advancers at the NYSE and an 11-to-10 lead at the Nasdaq.

Reviewing Thursday's economic data:

• Q2 Productivity-Prel 3.7% (Briefing.com consensus 1.7%); Prior was revised to -1.2% from -2.1%; Q2 Unit Labor Costs-Prel 1.6% (Briefing.com consensus 2.7%); Prior was revised to 3.3% from 4.2%
  • The key takeaway from the report is that the pickup in productivity and the deceleration in unit labor costs is a good combination for the soft-landing view.
• Weekly Initial Claims 227K (Briefing.com consensus 225K); Prior 221K; Weekly Continuing Claims 1.700 mln; Prior was revised to 1.679 mln from 1.690 mln
  • The key takeaway from the report is that initial claims -- a leading indicator -- are not leading anyone to think yet that the labor market is cracking under the weight of the Fed's prior rate hikes, which is important because a strong labor market is key to a more upbeat economic outlook.
• July S&P Global US Services PMI - Final 52.3; Prior 54.4
• June Factory Orders 2.3% (Briefing.com consensus 2.0%); Prior was revised to 0.4% from 0.3%
  • The key takeaway from the report is that business spending was on the softer side in June, evidenced by the slight 0.1% increase in new orders for nondefense capital goods excluding aircraft.
• July ISM Non-Manufacturing Index 52.7% (Briefing.com consensus 53.0%); Prior 53.9%
  • The key takeaway from the report is that services sector activity continued to expand in July, but at a slower pace than the prior month. Even so, the report said that the majority of respondents remain cautiously optimistic about business conditions and the economy.

The major indices saw somewhat choppy action on Friday as participants digested a slate of factors. Market participants were reacting to the earnings results from Apple (AAPL) and Amazon (AMZN), the July Employment Situation Report, and falling Treasury yields.

The pullback in market rates was in response to the jobs report, which showed a slowdown in nonfarm payroll growth that has the market considering the idea that it may be enough to keep the Fed on hold. The 2-yr note yield fell 12 basis points to 4.78% and the 10-yr note yield fell 13 basis points to 4.06%.

Stocks found some upside momentum shortly after the open when the S&P 500 bounced off the 4,500 level. The major indices were trading up until selling increased in the afternoon trade. There was no specific catalyst to fuel the afternoon selling, but profit-taking activity was likely a driving factor. Ultimately, the major indices closed near their lows of the day, which had the S&P 500 below 4,500.

Reviewing Friday's economic data:

• Nonfarm payrolls rose by 187,000 in July (Briefing.com consensus 200,000) following a revised increase of 185,000 in June (from 209,000).
• Nonfarm private payrolls rose by 172,000 in July (Briefing.com consensus 175,000) following a revised increase of 128,000 in June (from 149,000).
• Average hourly earnings rose by 0.4% in July (Briefing.com consensus 0.3%) following a 0.4% increase in June.
• The unemployment rate fell to 3.5% (Briefing.com consensus 3.6%) from 3.6% in June.
• The average workweek fell to 34.3 hours (Briefing.com consensus 34.4%) from 34.4.
  • The key takeaway from the report is that labor supply continues to be tight, which could make it difficult to achieve a more Fed-pleasing moderation in wage growth. That might not translate into another increase in the target range for the fed funds rate, but it does fit the notion that the Fed will be inclined to keep the policy rate higher for longer.